SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K405
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ................ to ...................
Commission File Number 0-5486
PRESIDENTIAL LIFE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-2652144
State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
69 Lydecker Street, Nyack, New York 10960
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (914) 358-2300
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in
Part III of this Form 10-K405 or any amendment to this Form 10-K405. [ X ]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant as of March 20, 1998 was approximately $654,301,031 based upon the
average bid and asked prices of such stock on that date.
The number of shares outstanding of the Registrant's common stock as of
March 20, 1998 was 32,311,162.
DOCUMENTS INCORPORATED BY REFERENCE
Selected designated portions of the definitive proxy statement to be used in
connection with the registrant's 1997 Annual Meeting of Shareholders are
incorporated by reference into Part III of this Form 10-K405. Other documents
incorporated by reference into this Form 10-K405 are listed in the Exhibit
Index.
PART I
Item 1. Business
General
Presidential Life Corporation (the "Company") is an insurance
holding company that, through its wholly-owned subsidiary Presidential
Life Insurance Company (the "Insurance Company"), operates principally
in a single business segment with two primary lines of
business--individual annuities and individual life insurance. Unless
the context otherwise requires, the "Company" shall be deemed to
include Presidential Life Corporation and its subsidiaries. The
Company was founded in 1969 and, through the Insurance Company, is
licensed to market its products in 48 states and the District of
Columbia. Approximately 67.3% of the Company's fiscal 1997 annuity and
life insurance products were sold to individuals residing in the State
of New York.
Products
The Company currently emphasizes the sale of a variety of annual
and single premium life insurance products, as well as single premium
and flexible premium annuity products (including those written in
connection with funding agreements for certain state lotteries, group
annuities and other structured settlements). Each of these products
is designed to meet the needs of increasingly sophisticated consumers
for supplemental retirement income, estate planning and protection from
unexpected death.
Annuity Business
Industry-wide sales of annuity products have experienced strong
growth in recent years. Annuities currently enjoy an advantage over
certain other savings mechanisms because the annuitant receives a tax
deferred accrual of interest on his or her investment.
Single Premium Annuity products require a one-time lump sum
premium payment. During the accumulation period, the accrual of
interest is on a tax deferred basis to the annuitant.
Single Premium Deferred Annuities ("SPDAs") provide for a single
premium payment at the time of issue, an accumulation period and an
annuity payout period at some future date. During the accumulation
period, the Company credits the account value of the annuitant with
interest earnings at a current interest rate that is guaranteed for
periods ranging from one to five years, at the annuitant's option, and
that, thereafter, is subject to change based on market and other
conditions. Each contract also has a minimum guaranteed rate. This
accrual of interest during the accumulation period is on a tax deferred
basis to the annuitant. After the number of years specified in the
annuity contract, the annuitant may elect to take the proceeds of the
annuity as a single payment, a specified income for life or a specified
income for a fixed number of years. The annuitant is permitted at any
time during the accumulation period to withdraw all or part of the
single premium paid plus the amount credited to his or her account.
Any such withdrawal, however, typically is subject to a surrender
charge during the early years of the annuity contract.
Single Premium Immediate Annuity Products ("SPIAs") guarantee a
stream of payments which begin immediately and continue for the life
of the annuitant. The payment may be guaranteed for a period of time
(typically five to 20 years) (the "Guarantee Period"). If the
annuitant dies during the Guarantee Period, payments will continue to
be made to the annuitant's beneficiary for the balance of the Guarantee
Period. SPIAs differ from deferred annuities in that generally they
provide for payments to begin immediately and are not subject to
surrender or loan. The implicit interest rate on SPIAs is based on
market conditions which existed at the time that the annuity was issued
and is guaranteed for the term of the annuity.
Single Premium Immediate Income Products ("SPIIs") are similar to
SPIAs in that they guarantee a stream of payments. Unlike SPIAs, SPII
payments always are guaranteed for a specified period of time, not for
the life of the annuitant. Payments are made to the payee or
beneficiary even if the annuitant dies during the payout period.
Single Premium Immediate Structured Settlement Annuities provide
an alternative to a lump-sum payment or settlement in the case of a
lottery or a personal injury case, as the case may be, and generally
are purchased by state lottery agencies for the benefit of a lottery
winner or by property and casualty insurance companies for the benefit
of an injured claimant, as the case may be, with benefits scheduled
over a fixed period or, over a fixed period and for the life of the
annuitant thereafter. Structured settlements offer tax advantaged
long-range financial security to the annuitant and facilitate the
operations of state lottery agencies and the ability of casualty
insurance carriers to effect claim settlements. Structured settlement
annuities are long-term in nature, guarantee a fixed benefit stream and
cannot be surrendered or borrowed against.
Flexible Premium Annuity products provide similar benefits to
those provided by the Company's single premium annuity products, but
instead permit periodic premium payments in such amounts as the holder
deems appropriate. As a result, the benefits attributable to such
products will fluctuate according to the level of such payments.
Group Terminal Funding Annuity products provide benefits similar
to single premium immediate annuities. Benefits are provided to
employees when a company's pension plan is terminated or when the
employer wants to transfer liability for making payments. Group
terminal funding annuities cannot be surrendered or borrowed against.
All of the Company's annuity products provide minimum interest
rate guarantees. The minimum guaranteed rates on the Company's annuity
products currently range from 4% to 5 1/2% annually and the contracts
(except for SPIAs) are designed to permit the Company to change the
crediting rates annually subject to the minimum guaranteed rate. The
Company takes into account the profitability of its annuity business
and its relative competitive position in determining the frequency and
extent of changes to the interest crediting rates.
The Company's deferred annuity products are designed to encourage
persistency (see "Pricing" below for a definition of the term
"persistency") by incorporating surrender charges that exceed the cost
of issuing the annuity. An annuitant may not terminate or withdraw
substantial funds for periods generally ranging from one to seven years
without incurring significant penalties in the form of surrender
charges. Notwithstanding the foregoing, approximately 60.2% of the
Company's deferred annuity contracts in force (measured by reserves)
as of December 31, 1997 are surrenderable without charge.
The following table presents annuity products in force measured
by reserves, as well as certain statistical data for each of the years
in the five fiscal year period ended December 31, 1997, in each case,
as determined in accordance with GAAP.
<TABLE>
ANNUITIES IN FORCE
Year Ended December 31,
1997 1996 1995 1994 1993
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Single premium
immediate
structured
settlement
annuities $ 167,269 $ 164,214 $ 163,384 $ 159,508 $ 156,339
Single premium
immediate
annuities 281,665 263,974 262,449 277,463 303,503
Total immediate
annuities 448,934 428,188 425,833 436,971 459,842
Single premium
deferred
annuities 835,900 810,636 808,292 787,290 807,562
Flexible premium
annuities 168,023 182,505 196,406 195,144 198,162
Group terminal
funding
annuities 103,965 103,941 104,046 103,232 103,338
Total annuities $1,556,822 $1,525,270 $1,534,577 $1,522,637 $1,568,904
</TABLE>
<TABLE>
For the fiscal year ended December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Ratio of annualized
voluntary terminations
(surrenders and lapses)
to mean insurance
in force 15.2% 15.3% 16.5% 19.7% 20.6%
At end of year:
Number of life
insurance policies
in force 18,708 19,069 19,650 20,359 21,627
Number of annuity
contracts in
force 45,554 45,717 50,694 53,378 57,628
Average size of
life insurance
policy in force $ 44,006 $ 45,352 $ 47,518 $ 49,347 $ 52,038
Average size of
annuity contract
in force $ 34,175 $ 33,363 $ 30,271 $ 28,526 $ 27,225
</TABLE>
Annuity Considerations and Premiums - The following table sets
forth certain information with respect to the Insurance Company's
annuity considerations and premium revenues for each of the five fiscal
years ended December 31, 1997, as determined in accordance with
statutory accounting principles. Premiums shown on the Company's
consolidated financial statements in accordance with GAAP consist of
premiums received for whole or term life insurance products, as well
as that portion of the Company's single premium immediate annuities
which have life contingencies. With respect to that portion of single
premium annuity contracts without life contingencies, as well as
deferred annuities and universal life insurance products, premiums
collected by the Company are not reported as premium revenues, but
rather are reported as additions to policyholder account balances on
the Company's consolidated balance sheet.
<TABLE>
Distribution of Products - By Gross Premiums and Other Considerations
For the fiscal year ended December 31,
1997 1996 1995 1994 1993
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Annuity
Considerations $132,601 $102,343 $ 97,313 $44,574 $44,172
Whole Life and
Term Life 8,364 8,254 8,200 8,363 9,260
Universal Life 3,811 3,152 3,581 4,320 3,449
Total Premiums and
Considerations $144,776 $113,749 $109,094 $57,257 $56,881
</TABLE>
Life Insurance Business
Universal Life policies are interest-sensitive products which
typically provide the insured with "nonparticipating" (i.e.
non-dividend paying) life insurance with a guaranteed cash value.
Current interest is credited to the policy's cash value based upon
interest rates that periodically are revised by the Company to reflect
current economic conditions (primarily interest rates). In no event,
however, will the interest rate credited on the policy's cash value be
less than the guaranteed rate specified in the policy. The Company
offers both flexible premium and single premium universal life
insurance products. The Company's flexible premium and single premium
universal life insurance products differ based on policy provisions
affecting the amount and timing of premium payments.
Whole Life policies are products which provide the insured with
life insurance with a cash value. Current interest is credited to the
policy's cash value based upon interest rates which existed at the time
that the policy was issued. Typically, a fixed premium, which costs
more than comparable term coverage when the policyholder is younger,
but less than comparable term coverage as the policyholder grows older,
is paid over a period of years. Whole life insurance products combine
insurance protection with a savings plan that gradually increases in
amount over time. With respect to the Company's whole life insurance
products, the policyholder may borrow against the policy's accumulated
cash value. However, the death benefit is decreased by the amount of
the outstanding loan. In addition, the policyholder may choose to
surrender the policy and receive the accumulated cash value rather than
continuing the insurance protection.
Term Life policies are products which provide insurance protection
if the insured dies during the time period specified in the policy.
No cash value is built up. These products provide the maximum benefit
for the lowest initial premium outlay. The Company's term life
insurance products include annually renewable, convertible and
decreasing term insurance.
Graded Benefit Life policies are products designed for the upper
age (i.e. ages 50 to 80), sub-standard applicant. Depending upon age,
these products provide for a limited death benefit of either the return
of premium plus 5% interest for three years, or the return of premium
plus 5% interest for two years. Thereafter, the death benefit is
limited to the face amount of the policy. This product typically is
offered with a maximum face value of $25,000.
Increasing Premium Whole Life policies are products which have
characteristics of both whole life and term life products. Initial
premiums are comparatively low and generally increase each year until
the twentieth policy year when the premium becomes fixed. No cash
values are built up in the early years of the policy, but cash values
do begin to accumulate in the later (typically around the fifteenth
policy year) years of the policy.
Insurance Policies in Force - The following table provides a
reconciliation of beginning and ending universal, whole and term life
insurance policies, in force, as well as certain statistical data for
each of the years in the five fiscal year period ended December 31,
1997.
<TABLE>
LIFE INSURANCE IN FORCE
1997 1996 1995 1994 1993
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
In force beginning
of year
Universal $384,008 $393,002 $ 392,774 $ 398,720 $ 417,198
Whole<F1> 304,740 351,479 425,950 525,517 652,437
Term 176,061 189,254 185,934 201,194 221,208
Total 864,809 933,735 1,004,658 1,125,431 1,290,843
Sales and additions:
Universal 25,747 16,526 20,490 23,447 16,627
Whole<F1> 42,596 44,785 54,089 62,414 63,356
Term 28,985 19,295 29,404 17,753 16,073
Total 97,328 80,606 103,983 103,614 96,056
Terminations:
Death 6,549 7,047 10,329 5,639 6,322
Surrenders and
conversions 19,387 16,768 13,009 16,554 25,272
Lapses 108,846 121,761 147,134 195,309 223,935
Other 4,099 3,956 4,334 6,885 5,939
Total 138,881 149,532 174,906 224,387 261,468
In force end of year:
Universal 383,233 384,008 393,002 392,774 398,720
Whole<F1> 263,554 304,740 351,479 425,950 525,517
Term 176,470 176,061 189,254 185,934 201,194
Total $823,257 $864,809 $933,735 $1,004,658 $1,125,431
The amounts in force
at end of year are
before reinsurance
ceded in the
following amounts
Total $476,248 $517,484 $573,324 $ 626,152 $ 716,527
Total insurance in
force at end of year
net of reinsurance $347,009 $347,325 $360,411 $ 378,506 $ 408,904
____________
<FN>
<F1> Includes graded benefit life insurance products.
</FN>
</TABLE>
Marketing and Distribution
The Company, through the Insurance Company, is licensed to market
its products in 48 states and in the District of Columbia. The Company
sells its individual annuity and life insurance products through
approximately 480 independent general agents (approximately 245 of
which are located in the State of New York), who are independent
contractors. These independent general agents market the Company's
products through approximately 7,880 licensed insurance agents or
brokers, most of whom also write products similar to those sold by the
Company for other companies. Management believes that the Company
offers competitive commission rates and seeks to provide innovative
products and quality service to its independent general agents.
Compensation of agents is strictly regulated by the New York State
Department of Insurance (the "NYSDI").
Cash commissions, as a percentage of first year premiums, are
higher for life insurance sales than annuity sales. Commissions are
based on a percentage of the annual premiums paid and consist of both
a higher first year commission and a lower renewal commission on life
insurance premiums paid after the first year. As is customary in the
industry, the Company pays agents commissions of up to an aggregate of
55.0% of first year premiums actually received. Agents can be subject
to a chargeback of all or a portion of the commissions paid in the
event an annuity contract or a life insurance policy is cancelled or
surrendered, including cancellations for the nonpayment of premiums,
within the first 12 months of issuance.
The independent general agency system has been the Insurance
Company's primary distribution system since the Insurance Company was
founded. Management believes that the Company's consistent focus on
the independent general agent distribution system provides a cost
advantage, since the Company incurs no fixed costs associated with
recruiting, training and maintaining employee agents. Accordingly, a
substantial portion of the costs associated with generating new
business for the Company are not fixed costs but vary directly with the
level of business produced.
Since the Company utilizes independent general agents to market
its products, it is not dependent on any one agency for any substantial
amount of its business. No one agency accounted for more than 5.1% of
the Company's combined individual life insurance policies and annuity
contracts sold during fiscal 1997. On the other hand, the independent
agents are not captive to the Company, and most write products similar
to those sold by the Company for other companies. This can result in
significant sales declines if for any reason the Company is relatively
less competitive or if there is cause for general concern.
Among other things, crediting rates, commissions, the perceived
quality of the issuer, product features and services generally are
significant factors that management believes influence an agent's
willingness and ability to sell particular annuity products. The
Company generally issues annuity contracts, together with the agent's
commission check, within two business days of receiving the application
and premium. The Company also seeks to provide ongoing service to the
agent. Towards that end, the Company provides agents with access to
the Company's senior executives. In addition, agents and contract
owners can access information about their contracts via a toll-free
telephone number.
The Company's top ten general agents accounted for approximately
45.9% and 29.7% of the Company's individual life insurance policies and
annuity contracts sold, (measured by the number of policies or
contracts sold, as the case may be), respectively during fiscal 1997.
Of the Company's individual life insurance policies sold, no single
agent accounted for more than 2.3% and no single general agency
accounted for 12.9% during 1997. Of the Company's annuity contracts
sold no single agent accounted for more than 1.0% and no single general
agency accounted for more than 7.2% during fiscal 1997. Until his death in
December of 1995, the president and principal owner of the general
agency that accounted for approximately 0% and 10.2% of such business
during fiscal 1995 (i.e., Pensions for Business, Inc. ("Pensions for
Business")) was a director of the Company. The loss of any single
sales source would not have a material adverse effect on the Company,
but the loss of several could cause a decline in sales until they are
replaced by the appointment of other general agents. The Company's
agency department actively recruits new general agents on a continuous basis.
Pricing
Management believes that the Company is able to offer its products
at competitive prices to its targeted markets as a result of: (i)
maintaining relatively low issuance costs by selling through the
independent general agency system; (ii) minimizing home office
administrative costs; and (iii) utilizing appropriate underwriting
guidelines.
The long-term profitability of sales of life and most annuity
products depends on the degree of margin of the actuarial assumptions
that underlie the pricing of such products. Actuarial calculations for
such products, and the ultimate profitability of sales of such
products, are based on four major factors: (i) persistency; (ii) rate
of return on cash invested during the life of the policy or contract;
(iii) expenses of acquiring and administering the policy or contract;
and (iv) mortality.
Persistency is the extent to which insurance policies which are
sold are maintained by the policy holder. Such holders sometimes do
not pay premiums, thus, causing their policies to lapse.
The assumed rate of return on invested cash and desired spreads
during the period that insurance policies or annuity contracts are in
force also affects pricing of products and currently includes an
assumption by the Company of a specified rate of return and/or spread
on its investments for each year that such insurance or annuity product
is in force.
Another major factor affecting profitability is the level of
expenses. Management believes that one of the Company's strengths is
its concentration on minimizing expenses through periodic review and
adjustment of general and administrative costs.
Mortality is the rate of death experienced by life insurance
policyholders and certain annuitants taken as a group. For calculating
premiums, the Company uses actuarial assumptions with margins added to
allow for adverse statistical variations. Actual mortality experience
in a particular period may be different than actuarially expected
mortality experience and, consequently, may adversely affect the
Company's operating results for such period.
Underwriting Procedures
Premiums charged on insurance products are based, in part, on
assumptions about the expected mortality experience. In that regard,
the Company has adopted and follows detailed, uniform underwriting
procedures designed to assess and quantify insurance risks before
issuing life insurance policies to individuals. To implement these
procedures, the Company employs an experienced professional
underwriting staff. The underwriting practice of the Company is to
require attending physicians' statements and medical examinations for
each applicant over age 55 or for policies in excess of certain
prescribed policy amounts, ranging from $25,000 and up. These
requirements are graduated according to the applicant's age and the
face amount of the policy. The Company also carefully reviews medical
records and each applicant's written application for insurance, which
generally is prepared under the supervision of one of the Company's
independent general agents. The factors considered in evaluating an
application for individual life insurance coverage include the
applicant's age, occupation, avocations, driving record, finances,
aviation activities, smoking habits, alcohol usage and general health
and medical history. These factors are discovered through the
application, attending physicians' statements, consumer investigation
reports from investigative agencies, direct contact, motor vehicle
reports and the Medical Information Bureau, an insurance industry
information service. In accordance with industry practice, material
misrepresentations on a policy application can result in the
cancellation by the Company of the policy under the two year
incontestability clause in the general provisions of the policy.
To the extent that an applicant does not meet the Company's
underwriting standards for issuance of a policy at the standard risk
classifications, the Company may offer to issue a classified,
sub-standard or impaired risk policy for a risk adjusted premium amount
rather than declining the application. The amount of the Company's
impaired risk insurance in force in proportion to the total amount of
the Company's individual life insurance in force was approximately 4.4%
at December 31, 1997.
Acquired Immune Deficiency Syndrome ("AIDS"), which has received
wide publicity because of its serious public health implications,
presents special concerns to the life insurance industry. Mortality
risks are accepted by insurers based on methods of classification
designed to appropriately relate premiums charged to such risks and,
in this connection, steps have been taken toward strengthening the
Company's underwriting and selection process. The Company considers
AIDS information in underwriting and pricing decisions in accordance
with applicable laws. A prospective policyholder must submit to a
blood or urine test, which includes AIDS antibody screening, if the
amount of coverage applied for equals or exceeds $100,000. The
Company's own mortality experience reflects no significant adverse
impact as a result of any acceleration of AIDS-related claims. The
Company is continuing to monitor developments in this area but is
necessarily unable to predict the long term impact of this problem on
the life insurance industry, in general, or on the Company, in particular.
Life Insurance and Annuity Reserves
In accordance with applicable insurance regulations, the Company
has established and carries as liabilities in its statutory financial
statements actuarially determined reserves that are calculated to
satisfy its policy and contract obligations. Reserves, together with
premiums to be received on outstanding policies and contracts and
interest thereon at certain assumed rates, are calculated to be
sufficient to satisfy policy and contract obligations. The actuarial
factors used in determining such reserves are based on statutorily
prescribed mortality and morbidity tables and interest rates. Reserves
maintained also include unearned premiums, premium deposits, reserves
for claims that have been reported but are not yet paid, reserves for
claims that have been incurred but have not yet been reported and
claims in the process of settlement. Generally, the Company maintains
reserves on assumed reinsurance, but does not continue accumulating
reserves with respect to that portion of policies or contracts that are
reinsured with, or ceded to, other insurance companies. Reserves for
assumed reinsurance are computed on bases essentially comparable to
direct insurance reserves.
The reserves reflected in the Company's consolidated financial
statements included herein are calculated based on generally accepted
accounting principles ("GAAP") and differ from those specified by the
laws of the various states in which the Company does business and those
reflected in the Company's statutory financial statements. These
differences arise from the use of different mortality and morbidity
tables and interest rate assumptions, the introduction of lapse assumptions
into the reserve calculation and the use of the net level premium reserve
method on all insurance business. See "Notes 1G, 1H and 8 to the Notes to
the Consolidated Financial Statements."
The reserves reflected in the Company's consolidated financial
statements are based upon the Company's best estimates of mortality,
persistency, expenses and investment income, with appropriate
provisions for adverse statistical deviation and the use of the net
level premium method for all non-interest-sensitive products. For all
interest-sensitive products the policy account value is equal to the
accumulation of gross premiums plus interest credited less mortality
and expense charges and withdrawals. In determining reserves for its
insurance and annuity products, the Company performs periodic studies
to compare current experience for mortality, interest and lapse rates
with expected experience in the reserve assumptions. Differences are
reflected currently in earnings for each period. The Company
historically has not experienced significant adverse deviations from
its assumptions.
Claims Paying and Other Ratings
During 1997, the Insurance Company's rating was reaffirmed at "A-
(Excellent)" by A.M. Best. Publications of A.M. Best indicate that the
"A-" rating is assigned to those companies that, in A.M. Best's
opinion, have achieved excellent overall performance when compared to
the norms of the insurance industry and that generally have
demonstrated a strong ability to meet their respective policyholder and
other contractual obligations over a long period of time.
In evaluating a company's statutory financial and operating
performance, A.M. Best reviews the company's profitability, leverage
and liquidity, as well as the company's book of business, the adequacy
and soundness of its reinsurance, the quality and estimated market
value of its assets, the adequacy of its reserves and the experience
and competency of its management.
A.M. Best's rating is based on factors which primarily are
relevant to policyholders, agents and intermediaries and is not
directed towards the protection of investors, nor is it intended to
allow investors to rely on such a rating in evaluating the financial
condition of the Insurance Company. Moody's Investor Services rates
the Insurance Company's insurance financial strength as Baa2. The
Company's Senior Notes, due December 15, 2000 (the "Senior Notes"), are
rated BBB by Standard & Poor's Corporation ("Standard & Poor's") and
Ba1 by Moody's Investor Services.
Policy Claims
Claims are received and reviewed by claims examiners at the
Company's home office. The initial review of claims includes
verification that coverage is in force and that the claim is not
subject to an exclusion under the policy. Birth and death certificates
are basic requirements. Medical records and investigative reports are
ordered for contestable claims.
Reinsurance
The Company follows the usual industry practice of reinsuring
("ceding") portions of its life insurance risks with other companies,
a practice which permits the Company to write policies in amounts
larger than the risk it is willing to retain on any one life, and also
to continue writing a larger volume of new business. The Company also
reinsures a portion of its life insurance business in order to obtain
commissions on the insurance ceded and thereby reducing its net
commission expense. The maximum amount of individual life insurance
normally retained by the Company on any one life is $50,000 per policy
and $100,000 per life. The maximum retention with respect to impaired
risk policies typically is the same. The Company cedes insurance
primarily on an "automatic" basis, under which risks are ceded to a
reinsurer on specific blocks of business where the underlying risks
meet certain predetermined criteria, and on a "facultative" basis,
under which the reinsurer's prior approval is required on each risk
reinsured. Reinsurance assumed consists entirely of the Company's
participation in Servicemen's Group Life Insurance.
Use of reinsurance does not discharge an insurer from liability
on the insurance ceded. An insurer is required to pay the full amount
of its insurance obligations regardless of whether it is entitled or
able to receive payments from its reinsurer. No reinsurer of business
ceded by the Company has failed to pay any policy claims with respect
to such ceded business. At December 31, 1997, of the approximately
$1.0 billion of the Company's life insurance in force, the Company had
ceded to reinsurers approximately $476.2 million of such insurance in
force. The principal reinsuring companies of individual life policies
with whom the Company does business at December 31, 1997 (and their
corresponding A.M. Best ratings) were Life Reassurance Corporation of
America ("A+ (Superior)") and Swiss Re Life Company America ("A (Excellent)").
Competition
The Company operates in a highly competitive environment. There
are numerous insurance companies, banks, securities brokerage firms and
other financial intermediaries marketing insurance products, annuities,
and other investments that compete with the Company, many of which have
substantially greater resources than the Company.
The Company believes that the principal competitive factors in the
sale of annuity and life insurance products are product features,
commission structure, perceived stability of the insurer, claims paying
ratings, name recognition, crediting rates, and service. Many other
insurance and other companies are capable of competing for sales in the
Company's target markets.
Management believes that the Company's ability to compete is
dependent upon, among other things, its ability to retain and attract
independent general agents to market its products, its ability to
develop competitive products that also are profitable and its ability
to provide quality service. Management believes that the Company has
good relationships with its agents, has an adequate variety of products
approved for issuance and generally is competitive within the industry.
Investments and Investment Policy
The Company derives a substantial portion of its total revenues
from investment income. The Company manages most of its investments
internally. All investments made on behalf of the Company are governed
by the general requirements and guidelines established and approved by
the Company's investment committee (the "Investment Committee") and by
qualitative and quantitative limits prescribed by applicable insurance
laws and regulations. The Investment Committee meets regularly to set
and review investment policy and to approve current investment plans.
The actions of the Investment Committee are subject to review and
approval by the board of directors of the Insurance Company. The
Company's investment policy must comply with NYSDI regulations and the
regulations of other applicable regulatory bodies.
The Company's investment philosophy generally focuses on
purchasing investment grade securities with the intention of holding
such securities to maturity. The Company's investment philosophy is
focused on the intermediate to longer-term horizon and is not oriented
towards trading. However, as market opportunities, liquidity or
regulatory considerations may dictate, securities may be sold prior to
maturity. As of December 31, 1997, the Company has categorized all
fixed maturity securities as available for sale. The Company carries
such investments at market value.
The Company manages its investment portfolio to meet the
diversification, yield and liquidity requirements of its insurance
policy and annuity contract obligations. The Company's liquidity
requirements are monitored regularly so that cash flow needs are
sufficiently satisfied. Adjustments periodically are made to the
Company's investment policies to reflect changes in the Company's
short-and long-term cash needs, as well as changing business and
economic conditions.
As of December 31, 1997, approximately 24.5% of the Company's
investment portfolio was invested in mortgage-backed related securities
most of which are U.S. government and agency mortgage-backed
securities, and other mortgage-backed obligations, most of which are
collateralized mortgage obligations ("CMOs") backed by residential
mortgages. Most of the Company's CMOs represent beneficial ownership
interests in mortgage-backed securities of the Federal Home Loan
Mortgage Corporation ("FHLMC"), the Federal National Mortgage
Association ("FNMA"), the Government National Mortgage Association
("GNMA"), the Resolution Trust Corporation ("RTC") or other asset
backed securities. Mortgage-backed securities are subject to
significant prepayment risk due to the fact that, in periods of
declining interest rates, mortgages may be repaid more rapidly than
scheduled as borrowers refinance higher rate mortgages to take
advantage of the lower current rates. As a result, holders of
mortgage-backed securities may receive prepayments on their investments
which cannot be reinvested at an interest rate comparable to the rate
on the prepaid mortgages. Notwithstanding the foregoing, because the
Company historically has purchased CMOs in the secondary market at
prices which typically are below their par or maturity value, the
Company's portfolio has not been materially impacted as a result of
such prepayments. The Company does not invest in interest only or
principal only CMOs.
As of December 31, 1997, approximately 5.2% of the Company's
investment portfolio consisted of bonds acquired in private placements.
While these bonds are not usually registered with the Securities and
Exchange Commission (the "SEC" or "Commission"), management believes
that these bonds are marketable to other institutional investors.
Approximately 92.1% of the investments acquired by the Company in
private placements have been assigned a National Association Insurance
Commissioners ("NAIC") designation corresponding to one of the two
highest quality rating categories. NAIC designations corresponding to
the entire Investment Portfolio can be found on page 18.
As of December 31, 1997, approximately 8.4% of the Company's
investment portfolio, and approximately 41.4% of its stockholders'
equity, consisted of interests in over thirty limited partnerships
which are engaged in a variety of investment strategies, principally
including merchant banking, real estate and international
opportunities. In general, risks associated with such limited
partnerships include those related to their underlying investments
(i.e., equity securities, debt securities and real estate), plus a
level of illiquidity, which is mitigated by the ability of the Company
to take annual distributions of partnership earnings.
The limited partnerships that are involved in merchant banking
activities generally seek to achieve significant rates of return
(including capital gains) through a wide variety of investment
strategies, including leveraged acquisitions, bridge financing and
other private equity investments in existing businesses.
The limited partnerships that are involved in real estate
activities generally invest in real estate assets, real estate joint
ventures and real estate operating companies. These partnerships seek
to achieve significant rates of return by targeting investments which
provide a strategic or competitive advantage and are priced at levels
which the general partner believes to be attractive.
The limited partnerships that are involved in international
investments generally purchase sovereign debt, corporate debt and/or
equity in governments or foreign companies that are developing a
greater world wide presence. Such limited partnerships are operated
by a general partner who has a demonstrated expertise in this area and
country. Such investments involve risks related to the particular
country including political instability, currency fluctuations, and
repatriation restrictions.
The Company has been investing in limited partnerships for over
nine years. During this time, the Company has had an opportunity to
consider and evaluate a substantial number of limited partnerships and
their managers. The Company makes limited partnership investments
based on a number of considerations, including the reputation,
investment philosophy (particularly with respect to risk), performance
history and investment strategy of the manager of the limited
partnership. Managers of the limited partnerships in which the Company
is invested include, among others, Blackstone Investment Management,
Omega Institutional Partners, Goldman Sachs Partners, Trust Company of
the West Asset Management, Clayton Dubilier & Rice Partners, Apollo
Real Estate and DLJ Real Estate Capital.
Limited partnership investments are selected through a careful,
two-stage review process. Shirley P. Jordan, Executive Vice President
and Chief Investment Officer of the Insurance Company, and her staff
review the offering documents and performance history of each
investment manager. Ms. Jordan has more than 20 years of experience
in analyzing investments. Separately, the Investment Committee (which
is comprised of investment professionals who, collectively have more
than 80 years experience in analyzing investments) interviews the
manager to determine whether the investment philosophy (particularly
with respect to risk) and strategies of the limited partnership are in
the best interests of the Company. Only after a positive
recommendation is made by both the Chief Investment Officer and the
Investment Committee does the Company invest in a limited partnership.
In addition, the actions of the Investment Committee are subject to
review and approval by the board of directors of the Insurance Company.
To evaluate both the carrying value and the continuing appropriateness
of the Company's investment in any limited partnership, management
maintains ongoing discussions with the investment manager and considers
the limited partnership's operations, its current and near term
projected financial condition, earnings capacity and distributions
received by the Company during the year.
Pursuant to the terms of certain limited partnership agreements
to which the Company is a party, the Company is committed to
contribute, if called upon, an aggregate of approximately $73.7 million
of additional capital to certain of these limited partnerships.
However, management does not expect the entire amount to be drawn down
as certain of these limited partnerships are nearing the end of the
period during which investors are required to make contributions.
The book value of the Company's investments in limited
partnerships as of December 31, 1997, 1996 and 1995 was approximately
$208.2 million, $176.1 million and $150.3 million, respectively. Net
investment income derived from the Company's interests in limited
partnership investments aggregated approximately $39.8 million, $35.3
million and $25.3 million in fiscal 1997, 1996 and 1995, respectively.
Management anticipates that in the future it will continue to make
selective investments in limited partnerships as opportunities arise,
subject to the approval of the Chief Investment Officer and the
Investment Committee and the review and approval by the Board of
Directors. There can be no assurance that the Company will continue
to achieve the same level of returns on its investments in limited
partnerships that it has received during the foregoing periods or that
it will achieve any returns on such investments at all. In addition,
there can be no assurance that the Company will receive a return of all
or any portion of its current or future capital investments in limited
partnerships. The failure of the Company to receive the return of a
material portion of its capital investments in limited partnerships,
or to achieve historic levels of returns on such investments, could
have a material adverse effect on the Company's financial condition and
results of operations.
As of December 31, 1997, the Company's investment portfolio also
consisted of approximately 1.2% invested in convertible debt
securities, approximately 8.0% invested in preferred stock,
approximately 0.7% invested in mortgage loans, and approximately 1.8%
invested in common stock. The Company's mortgage loans were
collateralized by commercial office and retail properties located in
New York and Pennsylvania. The Company's only real estate investments
are two buildings which are used as the current home office of the
Insurance Company and two acres of undeveloped land in Nyack, New York.
In order to enhance investment income, the Company participates
in "dollar roll" repurchase agreement transactions. Such transactions
involve the sale of a mortgage-backed security to a holding institution
and a simultaneous agreement to purchase a substantially similar
security (with the same coupon rate as the security sold) for forward
settlement (typically, around 60 days) at a lower dollar price. The
proceeds are invested in short-term investment grade commercial paper
or loan participations at a positive spread until the settlement date
of the similar security. In connection with its "dollar roll"
transactions, the Company does not engage in yield maintenance
transactions. The purchase and maturity dates of all short-term
investments are matched exactly to the sale and purchase dates of the
underlying collateral, with a 90-day maximum for any one transaction.
During this period, the holding institution receives all income and
prepayments for the security. To reduce the risk that a party will
default on its obligations under the repurchase agreement, the Company
only enters into "dollar roll" transactions with major securities
dealers such as Morgan Stanley & Co. Incorporated, Goldman, Sachs &
Co., Merrill Lynch & Co., Salomon Brothers Inc., Smith Barney Shearson
Inc., Bear, Stearns & Co. Inc., CS First Boston and Sandler, O'Neill
L.P. Additionally, if the counterparty to the "dollar roll" agreement
defaults under the terms of such agreement, the Company is not
obligated to repurchase the underlying securities to the transaction.
Under GAAP, during the period between the sale by the Company of a
mortgage-backed security to the institution party to the "dollar roll"
transaction and the Company's repurchase of a substantially similar
mortgage-backed security from the holding institution, the Company's
consolidated balance sheet will reflect both the mortgage-backed
security sold to the holding institution and the cash received for such
security as assets, and the Company's repurchase obligation as a
liability. In fiscal 1997 and 1996, dollar roll transactions generated
approximately $1.4 million and $1 million, respectively, of net
investment income for the Company. Amounts outstanding to repurchase
securities under dollar roll repurchase agreements were approximately
$205.2 million and $200.9 million as of December 31, 1997 and December
31, 1996, respectively.
<TABLE>
The following table summarizes the Company's investment portfolio
at December 31, 1997.
Investment Portfolio
Total Carrying Value<F1>
(dollars in thousands)
<S> <C>
Fixed Maturities
Bonds and Notes:
U.S. Government, government agencies
and authorities<F2> $ 554,906
Investment grade corporate<F3> 685,361
Public utilities 203,272
Below investment grade corporate 105,870
Mortgage backed 162,932
Preferred stocks 197,583
Total Fixed Maturities<F4> 1,909,924
Equity Securities
Common stock 45,773
Other Investments:
Policy loans 18,120
Mortgage loans 17,865
Other long-term investments<F5> 208,162
Cash and short-term investments<F6> 277,578
Total cash and investments $2,477,422
__________________________
<FN>
<F1> All securities are classified as available for sale; accordingly
total carrying value equals estimated market value. Independent
pricing services provide market prices for most publicly-traded
securities. Where prices are unavailable from pricing services,
prices are obtained from securities dealers. Estimated market value
either approximates estimated carrying value or was not
readily ascertainable. See Note 1(c) to the Notes to the Consolidated
Financial Statements for an explanation of the methodology used to
value "Other Investments."
<F2> Approximately $425.6 million of such securities represent beneficial
ownership interests in mortgage backed securities of FDIC, FHLMC, FNMA,
GNMA or the RTC.
<F3> Ratings are based primarily upon those assigned by the NAIC and
converted to the generally comparable Moody's Investor Services
("Moodys") rating.
<F4> Includes approximately $46.1 million of convertible debt securities and
convertible preferred stock.
<F5> Consist principally of investments in limited partnerships which are
carried at cost and adjusted for income and losses, as well as
contributions and distributions.
<F6> Includes approximately $205.2 million attributable to "dollar roll"
repurchase agreements.
</FN>
</TABLE>
<TABLE>
The following table summarizes the Company's investment results
for the periods indicated, as determined in accordance with GAAP.
INVESTMENT RESULTS
Year Ended December 31,
1997 1996 1995 1994 1993
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Cash and total
invested
assets<F1> $2,398,240 $2,295,582 $2,065,285 $2,008,727 $2,060,270
Net investment
income<F2> $ 191,818 $ 186,180 $ 170,780 $ 157,251 $ 185,190
Effective yield<F3> 8.69% 8.83% 9.01% 8.49% 9.88%
Net realized
investment
gains<F4> $ 26,039 $ 20,020 $ 17,216 $ 7,259 $ 8,805
______________________________
<FN>
<F1> Average of cash and aggregate invested amounts at the beginning and
end of period.
<F2> Net investment income is net of investment expenses and excludes
capital gains and losses and provision for income taxes.
<F3> Net investment income divided by average cash and total invested
assets minus net investment income.
<F4> Net realized investment gains (losses) include provisions for
impairment in value that are considered other than temporary and
exclude provisions for income taxes.
</FN>
</TABLE>
<TABLE>
The following table sets forth the composition of the Company's
bond portfolio by rating as of December 31, 1997.
Bond Portfolio Ratings
Percent
of Total
Estimated Estimated
Market Market
Rating<F1> Value<F2> Value<F2>
(Dollars in thousands)
<S> <C> <C>
Aaa ......................... $ 551,303 32.2%
Aa ......................... 34,394 2.0
A ......................... 331,422 19.4
Baa ......................... 630,604 36.8
Total investment grade<F3>. 1,547,723 90.4
Ba ......................... 143,897 8.4
B ......................... 10,350 0.6
C ......................... 10,371 0.6
Total non-investment grade. 164,618 9.6
Total...................... $1,712,341 100.0%
______________________________
<FN>
<F1> Ratings are those assigned primarily by Moody's when available,
with remaining ratings as assigned by Standard & Poor's and converted
to a generally comparable Moody's rating. Bonds not rated by any
such organization (e.g., private placement securities) are included
based on the rating prescribed by the Securities Valuation
Office of the NAIC. NAIC class 1 is considered equivalent to an A
or higher rating; class 2, Baa; class 3, Ba; and classes 4-6, B and
below. All securities are classified as available for sale;
accordingly total carrying value equals estimated market value.
<F2> Independent pricing services provide market prices for most
publicly-traded securities. Where prices are unavailable from
pricing services, prices are obtained from securities dealers.
<F3> Approximately 34.1% of which consist of U.S. government and agency bonds.
</FN>
</TABLE>
According to Moody's, bonds which are rated "A" possess many
favorable investment attributes and are to be considered as upper
medium grade obligations. Moody's applies numerical modifiers "1", "2"
and "3" in each generic rating classification from Aa to B. Modifier
"1" indicates a bond in the higher end of a generic rating
classification.
The NAIC assigns securities quality ratings and uniform prices
called "NAIC Designations," which are used by insurers when preparing
their statutory annual statements. The NAIC assigns designations to
publicly traded as well as privately placed securities. The
designations assigned by the NAIC range from class 1 to class 6, with
a designation in class 1 being of the highest quality. NAIC ratings
are assigned annually as of December 31, and rerated periodically. Of
the bonds and notes in the Company's investment portfolio,
approximately 92.9% were in one of the highest two NAIC Designations
at December 31, 1997 The following table sets forth the carrying value
and estimated market value of these securities according to NAIC
Designations at December 31, 1997.
<TABLE>
Percent
of Total
NAIC Designations Estimated Estimated
(generally comparable to Market Market
Moody's ratings)<F1> Value <F2> Value<F2>
(Dollars in thousands)
<S> <C> <C>
1 (Aaa, Aa, A) ............. $ 914,589 53.4%
2 (Baa) .................... 675,831 39.5
3 (Ba) ..................... 103,180 6.0
4 (B) ...................... 10,967 0.6
5 (Caa, Ca) ................ 7,210 0.4
6 (C) ...................... 564 0.1
$1,712,341 100.0%
__________________________
<FN>
<F1> Comparison between NAIC Designations and Moody's rating is as
published by the NAIC. NAIC class 1 is considered equivalent to an
A or higher rating by Moody's; class 2, Baa; class 3, Ba; class 4,
B; class 5, Caa and Ca; and class 6, C. All securities are classified
as available for sale; accordingly total carrying value equals
estimated market value.
<F2> Independent pricing services provide market prices for most
publicly-traded securities. Where prices are unavailable from
pricing services, prices are obtained from securities dealers.
</FN>
</TABLE>
The Insurance Company is subject to Regulation 130 adopted and
promulgated by the NYSDI. Under this Regulation, the Insurance
Company's ownership of below investment grade debt securities is
limited to 20% of total admitted assets, as calculated under statutory
accounting. As of December 31, 1997, approximately 5.4% of the
Insurance Company's total admitted assets were invested in below
investment grade debt securities. In addition, as of that date, bond
holdings with a statutory carrying value of approximately $564,000 in
the Company's investment portfolio were in default. For a detailed
discussion concerning below investment grade debt securities, including
the risks inherent in such investments, see "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources." Also see "Note 2 to the
Notes to Consolidated Financial Statements" for certain other
information concerning the Company's investment portfolio.
<TABLE>
The following table sets forth the scheduled maturities for the
Company's investments in bonds and notes as of December 31, 1997.
Scheduled Maturities
Percent
of Total
Estimated Estimated
Market Market
Maturity<F1> Value<F2> Value<F2>
(Dollars in thousands)
<S> <C> <C>
Due in one year or less $ 11,410 0.7%
Due after one year through five years 124,031 7.2
Due after five years through 10 years 94,809 5.5
Due after 10 years through 20 years 1,319,159 77.1
Total 1,549,409 90.5
Mortgage-backed bonds 162,932 9.5
Total bonds and notes $1,712,341 100.0%
_________________________
<FN>
<F1> This table is based upon stated maturity dates and does not reflect the
effect of prepayments, which would shorten the average life of these
securities. All securities are classified as available for sale;
accordingly total carrying value equals estimated market value.
<F2> Independent pricing services provide market prices for most
publicly-traded securities. Where prices are unavailable from pricing
services, prices are obtained from securities dealers.
</FN>
</TABLE>
Insurance Regulation
General Regulation
As an insurance holding company, the Company is subject to
regulation by the State of New York, where the Insurance Company is
domiciled, as well as all states in which the Insurance Company
transacts business. Most states have enacted legislation that requires
each insurance company in a holding company system to register with the
insurance regulatory authority of its state of domicile and furnish to
it financial and other information concerning the operations of
companies within the holding company system that may materially affect
the operations, management or financial condition of the insurers
within the system. The Company has registered as a holding company
system in New York.
The laws and regulations of New York applicable to insurance
holding companies require, among other things, that all transactions
within a holding company system be fair and equitable and that charges
for services be reasonable. In addition, most transactions require
either prior notification to or approval of the Superintendent of
Insurance of the State of New York (the "Superintendent"). Prior
written approval of the Superintendent is required for the direct or
indirect acquisition of 10% or more of the insurance companies' voting
securities. Applicable state insurance laws, rather than federal
bankruptcy laws, also apply to the liquidation or reorganization of
insurance companies.
The Insurance Company is subject to regulation and supervision by
the insurance regulatory agencies of the states in which it is
authorized to transact business. State insurance laws establish
supervisory agencies with broad administrative and supervisory powers.
Principal among these powers are granting and revoking licenses
to transact business, regulating marketing and other trade practices,
operating guaranty associations, licensing agents, approving policy
forms, regulating certain premium rates, regulating insurance holding
company systems, establishing reserve requirements, prescribing the
form and content of required financial statements and reports,
performing financial, market conduct and other examinations,
determining the reasonableness and adequacy of statutory capital and
surplus, defining acceptable accounting principles, regulating the
type, valuation and amount of investments permitted, and limiting the
amount of dividends that can be paid and the size of transactions that
can be consummated without first obtaining regulatory approval.
During the last decade, the insurance regulatory framework has
been placed under increased scrutiny by various states, the federal
government and the NAIC. Various states have considered or enacted
legislation that changes, and in many cases increases, the states'
authority to regulate insurance companies. Legislation has been
introduced from time to time in Congress that could result in the
federal government assuming some role in the regulation of insurance
companies or allowing combinations between insurance companies, banks
and other entities. In recent years, the NAIC has approved and
recommended to the states for adoption and implementation several
regulatory initiatives designed to reduce the risk of insurance company
insolvencies and market conduct violations. These initiatives include
investment reserve requirements, risk-based capital standards,
codification of insurance accounting principles, new investment
standards and restrictions on an insurance company's ability to pay
dividends to its stockholders. The NAIC is also currently developing
model laws relating to product design and illustrations for annuity
products. Current proposals are still being debated and the Company
is monitoring developments in this area and the effects any changes
would have on the Company.
The Insurance Company is required to file detailed periodic
reports and financial statements with the state insurance regulators
in each of the states in which it does business. In addition,
insurance regulators periodically examine the Insurance Company's
financial condition, adherence to statutory accounting practices and
compliance with insurance department rules and regulations. As part
of their routine regulatory oversight process, the NYSDI generally
conducts detailed examinations every three years of the books, records
and accounts of the Insurance Company. The Insurance Company's last
examination occurred during 1997 for the three-year period ended
December 31, 1996. The final report did not raise any issues or
adjustments.
Regulation of Dividends and Other Payments from the Insurance Company
The Company is a legal entity separate and distinct from its
subsidiaries. As a holding company with no other business operations,
its primary sources of cash needed to meet its obligations, including
principal and interest payments on its outstanding indebtedness and to
pay dividends on its common stock, are rent from its real estate,
interest on its investments and dividends from the Insurance Company.
The Insurance Company is subject to various regulatory
restrictions on the maximum amount of payments, including loans or cash
advances, that it may make to the Company without obtaining prior
regulatory approval. As a New York domiciled insurance company, the
Insurance Company is subject to restrictions on the payment of
dividends under New York law. New York law states that no domestic
stock life insurance company shall distribute any dividend to its
shareholders unless a notice of its intention to declare such dividend
and the amount thereof shall have been filed with the Superintendent
not less than 30 days in advance of such proposed declaration. The
Superintendent may disapprove such distribution by giving written
notice to such company within 30 days after such filing that he or she
finds that the financial condition of the company does not warrant such
distribution. The NYSDI has established informal guidelines for the
Superintendent's determinations which focus upon, among other things,
the overall financial condition and profitability of the insurer under
statutory accounting practices. During fiscal 1997, 1996 and 1995, the
Insurance Company paid dividends of $24.8 million, $15 million and
$5 million, respectively, to the Company.
The payment of dividends by the Company to its shareholders are
further restricted by the indentures underlying the Company's
$50,000,000 aggregate principal amount of 9 1/2% Senior Notes (the
"Senior Notes"). See "Note 3 of the Notes to Consolidated Financial
Statements."
In the past, the NAIC proposed the NAIC Model Act which limits
dividends that may be paid in any calendar year without regulatory
approval to the lesser of (1) 10% of the insurer's statutory surplus
at the prior year-end or (2) 100% of the statutory net gain from
operations of the insurer (not including realized capital gains) for
the prior calendar year. The NAIC has determined that it will not grant
accreditation to any state insurance regulatory authority in a state
that has not enacted statutes "substantially similar" to the NAIC Model
Act regulating the payment of dividends by insurers. The New York
statutes applicable to the Insurance Company do not conform to the NAIC
Model Act and the legislature of New York may consider legislation to
bring New York laws into substantial compliance with the NAIC Model Act.
Investment Reserve
Asset Valuation Reserve. Statutory accounting practices require
a life insurance company to maintain an Asset Valuation Reserve ("AVR")
to absorb realized and unrealized capital gains and losses on a portion
of an insurer's fixed income securities and equity securities.
The AVR is required to stabilize statutory surplus from
fluctuations in the market value of bonds, stocks, mortgage loans, real
estate and other invested assets. The maximum AVR is calculated based
on the application of various factors that are applied to the assets
in an insurer's portfolio. The AVR generally captures credit-related
realized and unrealized capital gains or losses on such assets. Each
year the amount of an insurer's AVR will fluctuate as the investment
portfolio changes and capital gains or losses are absorbed by the
reserve. To adjust for such changes over time, contributions must be
made to the AVR in an aggregate annual amount equal to 20% of the
difference between the maximum AVR as calculated and the actual AVR.
These contributions may result in a slower rate of growth in or a reduction
of the Insurance Company's Unassigned Surplus. The extent of the
impact of the AVR on the Insurance Company's surplus depends in part
on the future composition of the Insurance Company's investment portfolio.
Interest Maintenance Reserve. The Interest Maintenance Reserve
(the "IMR") captures capital gains and losses (net of taxes) on fixed
income investments (primarily bonds and mortgage loans) resulting from
interest rate changes, which are amortized into net income over the
estimated remaining periods to maturity of the investments sold. The
extent of the impact of the IMR depends on the amount of future capital
gains and losses on fixed maturity investments resulting from interest
rate changes.
NAIC-IRIS Ratios
The NAIC's Insurance Regulatory Information System ("IRIS") was
developed by a committee of state insurance regulators and primarily
is intended to assist state insurance departments in executing their
statutory mandates to oversee the financial condition of insurance
companies operating in their respective states.
IRIS identifies 12 industry ratios and specifies "normal ranges" for
each ratio. The IRIS ratios were designed to advise state insurance
regulators of significant changes in the operations of an insurance
company, such as changes in its product mix, large reinsurance
transactions, increases or decreases in premiums received and certain
other changes in operations. These changes need not result from any
problems with an insurance company but merely indicate changes in
certain ratios outside ranges defined as normal by the NAIC. When an
insurance company has four or more ratios falling outside "normal
ranges," such state regulators may, but are not obligated to, inquire
of the company regarding the nature of the company's business to
determine the reasons for the ratios being outside the "normal range."
No regulatory significance results from being out of the normal range
on fewer than four of the ratios. The Company anticipates that it may
from time to time fall outside the "normal range" on some of these
ratios. For the year ended December 31, 1997, the Company was within
the normal range for all of the ratios. If four or more of the
Company's ratios fall outside the "normal range," the Company is likely
to experience regulatory inquiry and a higher level of scrutiny.
Risk-Based Capital
Under the NAIC's risk-based capital formula, insurance companies
must calculate and report information under a risk-based capital
formula. The standards require the computation of a risk-based capital
amount which then is compared to a company's actual total adjusted
capital. The computation involves applying factors to various
financial data to address four primary risks: asset default, adverse
insurance experience, disintermediation and external events. This
information is intended to permit insurance regulators to identify and
require remedial action for inadequately capitalized insurance
companies, but is not designed to rank adequately capitalized
companies. The NAIC formula provides for four levels of potential
involvement by state regulators for inadequately capitalized insurance
companies, ranging from regulatory control of the insurance company to
a requirement for the insurance company to submit a plan to improve its
capital. At December 31, 1997, the Insurance Company's total adjusted
capital was $370.7 million and the authorized control level risk based
capital was $61.8 million.
Assessments Against Insurers
Most applicable jurisdictions require insurance companies to
participate in guaranty funds which are designed to indemnify
policyholders of insolvent insurance companies. Insurers authorized
to transact business in these jurisdictions generally are subject to
assessments based on annual direct premiums written in that
jurisdiction. These assessments may be deferred or forgiven under most
guaranty laws if they would threaten an insurer's solvency and, in
certain instances, may be offset against future state premium taxes.
The amount of these assessments in prior years has not been material,
however, the amount and timing of any future assessment on the
Insurance Company under these laws cannot be reasonably estimated and
are beyond the control of the Company and the Insurance Company.
Recent failures of substantially larger insurance companies could
result in future assessments in material amounts.
Regulation at Federal Level
Although the federal government generally does not directly
regulate the insurance business, federal initiatives often have an
impact on the business in a variety of ways. Current and proposed
federal measures that may significantly affect the insurance business
include limitations on antitrust immunity, minimum solvency
requirements and the removal of barriers restricting banks from
engaging in the insurance and mutual fund business. It is not possible
to predict the outcome of any such congressional activity nor the
potential effects thereof on the Company.
Affiliates
In addition to the Insurance Company, the Company has three
subsidiaries, Presidential Securities Corporation, P.L. Assigned
Services Corporation and Presidential Asset Management Company, Inc.
In the aggregate, these three subsidiaries are not material to the
Company's consolidated financial condition or results of operations.
Recent Developments
As part of a proposed rehabilitation plan for Fidelity Mutual Life
Insurance Company ("Fidelity"), on January 11, 1995 the Insurance
Company signed a definitive purchase agreement with the Pennsylvania
Insurance Commissioner and Fidelity to invest up to $45 million for a
minority (49.9%) stake in a Fidelity subsidiary insurance holding
company. In addition, the Company had agreed to purchase $25 million
of Senior Notes of such company.
The Company was informed on January 10, 1996 by the Pennsylvania
Insurance Commissioner that in response to the significant improvement
in the invested assets of Fidelity, she has reopened the process to
select an equity investor for the recapitalization and rehabilitation
of Fidelity.
The Company disagreed with the Insurance Commissioner's actions
and commenced litigation which was settled in the second quarter of
fiscal 1997. As part of the settlement, the Company received $1.7
million.
Item 2. Properties
The Company owns, and the Insurance Company is the sole occupant
of, two adjacent office buildings located at 69 Lydecker Street and 10
North Broadway in Nyack, New York. These buildings contain an
aggregate of approximately 45,000 square feet of useable floor space.
The Insurance Company also owns two acres of unimproved land in
Nyack, New York.
Management believes that the Company's present facilities are
adequate for its anticipated needs.
Item 3. Legal Proceedings
From time to time, the Company is involved in litigation relating
to claims arising out of its operations in the normal course of
business. As of March 20, 1998, the Company is not a party to any
legal proceedings, the adverse outcome of which, in management's
opinion, individually or in the aggregate, would have a material
adverse effect on the Company's financial condition or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted by the Company to its shareholders for
vote during the fiscal quarter ended December 31, 1997.
PART II
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters
The Company's common stock trades on The NASDAQ Stock Market (SM)
under the symbol "PLFE." The following table sets forth, for the
indicated periods, the high and low bid quotations for the common
stock, as reported by the National Association of Securities Dealers,
Inc., and the per share cash dividends declared on the common stock.
<TABLE>
Cash Dividends
High Low Declared Per Share
<S> <C> <C> <C>
Fiscal 1996
First Quarter $10 $ 8 5/8
Second Quarter 10 3/8 9 5/16 $.07
Third Quarter 11 9 7/18
Fourth Quarter 12 1/2 10 7/8 .08
Fiscal 1997
First Quarter 16 3/8 12 $.05
Second Quarter 20 1/8 13 1/4 .05
Third Quarter 20 1/4 17 1/2 .06
Fourth Quarter 20 5/8 19 1/8 .06
Fiscal 1998
First Quarter
(through March 20,
1998) 23 1/16 17 7/8 .06
</TABLE>
The Company regularly has paid semi-annual cash dividends since
1980. During the first quarter of 1998, the Company declared a
quarterly cash dividend of $.06 per share payable April 2, 1998. The
Company expects to continue its policy of paying regular cash
dividends, although there is no assurance as to future dividends
because they are dependent on future earnings, capital requirements,
financial condition, and dividends from the Insurance Company. Any
determination to pay dividends would be at the discretion of the
Company's Board of Directors and is subject to regulatory and
contractual restrictions as described in "Part I -- Business --
Insurance Regulation" and Part II -- Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Resources." At March 20, 1998, there were approximately
925 holders of record of the Company's common stock.
Item 6. Selected Financial Data
Selected consolidated financial data for the Company are presented below
for each of the five years in the period ended December 31, 1997. This data
should be read in conjunction with the Company's Consolidated Financial
Statements and notes thereto and Item 7, Management's Discussion and Analysis
of Results of Operations and Financial Condition.
<TABLE>
Income Statement Data:
Year Ended December 31,
1997 1996 1995 1994 1993
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Total Revenue $ 247,704 $ 223,674 $ 199,864 $ 174,074 $ 206,359
Benefits 136,998 124,260 123,923 119,731 126,740
Interest Expense
on Notes payable 5,850 5,049 5,045 5,266 6,522
Selling, General and
Administrative
Expenses 14,298 18,008 14,506 11,858 15,890
Total Benefits and
Expenses 157,146 147,317 143,474 136,855 149,152
Provision (benefit)
for Income Taxes 29,266 21,836 7,332 (2,693) 13,228<F1>
Net Income (Loss) $ 61,292 $ 49,058 $ 39,912 $ 46,825 $ 23,967
Income (Loss) Per
Share $ 1.87 $ 1.64 $ 1.46 $ 1.18 $ 1.53<F1>
Dividends Per Share $ .22 $ .15 $ .105 $ .09 $ .09
</TABLE>
<TABLE>
Balance Sheet Data:
At December 31,
1997 1996 1995 1994 1993
(in thousands)
<S> <C> <C> <C> <C> <C>
Assets $2,558,341 $2,406,925 $2,356,760 $2,026,044 $2,265,218
Total Capitalization
Notes Payable $ 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000
Shareholders'
Equity 502,654 423,063 401,060 255,953 264,447
Total $ 552,654 $ 473,063 $ 451,060 $ 305,953 $ 314,447
<FN>
<F1> Includes cumulative effect of change in accounting principle of
$2,846 or $.09 per share.
</FN>
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company operates principally in a single business segment with
two primary lines of business--individual annuities and individual life
insurance. Premiums shown on the Company's consolidated financial
statements in accordance with GAAP consist of premiums received for
whole or term life insurance products, as well as that portion of the
Company's single premium immediate annuities which have life
contingencies. With respect to that portion of single premium annuity
contracts without life contingencies, as well as single premium deferred
annuities and universal life insurance products, premiums collected by
the Company are not reported as premium revenues, but rather are
reported as additions to policyholders' account balances. With respect
to products that are accounted for as policyholders' account balances,
revenues are recognized over time in the form of policy fee income,
surrender charges and mortality and other charges deducted from the
policyholders' account balances. The Company's operating earnings are
derived primarily from these revenues, plus the Company's investment
results, including realized gains (losses), less interest credited,
benefits to policyholders and expenses.
Certain costs related to the sale of new business are deferred as
"deferred policy acquisition costs" ("DAC") and amortized into expenses
in proportion to the recognition of earned revenues. Costs deferred
include principally commissions, certain expenses of the policy issue
and underwriting departments and certain variable sales expenses. Under
certain circumstances, DAC will be expensed earlier than originally
estimated, including those circumstances where the policy terminations
are higher than originally estimated with respect to certain annuity
products. Most of the Company's annuity products have surrender charges
which are designed to discourage and mitigate the effect of early
terminations.
In June, 1997 the Insurance Company was notified that its A.M. Best
rating was reaffirmed at "A- (Excellent)". During the second quarter of
1997, the Insurance Company was notified that its Standard & Poor's
claims-paying rating was upgraded from BBBq to Aq and that its Moody's
Investors financial strength rating was upgraded from Baa3 to Baa2.
Results of Operations
Comparison of Fiscal Year 1997 to Fiscal Year 1996 and Fiscal Year
1996 to Fiscal Year 1995.
Revenues
Annuity Considerations and Life Insurance Premiums
Total annuity considerations and life insurance premiums increased
to approximately $23.6 million in fiscal 1997 from approximately $12.7
million in fiscal 1996, an increase of approximately 86.0%. Of this
amount, annuity considerations increased to approximately $19.7 million
in fiscal 1997 from approximately $8.5 million in fiscal 1996, an
increase of approximately $11.2 million. In accordance with generally
accepted accounting principles, sales of single premium deferred
annuities are not reported as insurance revenues, but rather as
additions to policyholder account balances. Sales of single premium
deferred annuities were approximately $125.5 million and $94.4 million
in fiscal 1997 and 1996, respectively. Management believes that the
increase in annuity considerations is due to the successful expansion of
our Marketing Department.
Total annuity considerations and life insurance premiums increased
to approximately $12.7 million in fiscal 1996 from approximately $8.2
million in fiscal 1995, an increase of approximately 55.2%. Of this
amount, annuity considerations increased to approximately $8.5 million
in fiscal 1996 from approximately $3.8 million in fiscal 1995, an
increase of approximately $4.7 million.
Policy Fee Income
Universal life and investment type policy fee income was
approximately $1.99 million in fiscal 1997, as compared to approximately
$2.09 million in fiscal 1996 and approximately $1.93 million in fiscal
1995. This represents approximately a 4.9% decrease comparing fiscal
1997 to fiscal 1996 and approximately an 8.1% increase comparing fiscal
1996 to fiscal 1995. The decrease in fiscal 1997 was primarily
attributable to the lower level of surrender charges incurred by
annuitants in connection with surrenders of their annuity contracts
during fiscal 1997. Surrenders of annuity products represented
approximately $117.4 million, $124.5 million, and $99.8 million during
fiscal 1997, 1996 and 1995, respectively.
Net Investment Income
Net investment income totaled approximately $191.8 million in
fiscal 1997, as compared to approximately $186.2 million in fiscal 1996
and approximately $170.8 million in fiscal 1995. This represents
approximately a 3.0% increase comparing fiscal 1997 to fiscal 1996 and
approximately a 9.0% increase comparing fiscal 1996 to fiscal 1995.
Investment income from "other invested assets" totaled approximately
$39.8 million in fiscal 1997, $35.3 million in fiscal 1996 and $25.3
million in fiscal 1995. In fiscal 1997 and 1996, the Insurance Company
participated in "dollar roll" transactions (i.e., the sale of a
mortgage-backed security and a simultaneous agreement to purchase a
similar security at a later date at a lower price) to enhance investment
income. The proceeds from the sale are invested in short-term
securities at a positive spread until the settlement date of the similar
security. During this period, the holding institution receives all
income and prepayments for the security. The Company's ratio of net
investment income to average cash and invested assets less net
investment income for the years ended December 31, 1997, 1996 and 1995
was approximately 8.69%, 8.83% and 9.01%, respectively. For additional
information, please refer to "Note 2 of the Notes to Consolidated
Financial Statements."
Realized Investment Gains and Losses
Realized investment gains amounted to approximately $26.0 million
in fiscal 1997, as compared to approximately $20.0 million of gains in
fiscal 1996 and gains of approximately $17.2 million in fiscal 1995.
Realized investment gains for the years ended December 31, 1997, 1996
and 1995 were partially offset by realized investment losses of
approximately $4.9 million, $1.9 million and $6.0 million, respectively,
attributable to writedowns of certain securities contained in the
Company's investment portfolio. There can be no assurance that the
Company's investment portfolio will yield comparable investment gains in
future periods.
Other Income
The increase in other income is the result of the settlement in the
second quarter of 1997 of the litigation with Fidelity Mutual Life
Insurance Company.
Total Benefits and Expenses
Total benefits and expenses for fiscal 1997 aggregated
approximately $157.1 million, as compared to approximately $147.3
million for fiscal 1996 and approximately $143.5 million for fiscal
1995. This represents an increase of approximately 6.7% comparing
fiscal 1997 to fiscal 1996 and an increase of approximately 2.7%
comparing fiscal 1996 to fiscal 1995. The reasons for these changes
will be discussed under the respective components below.
Interest Credited and Benefits to Policyholders
Interest credited and benefits to policyholders amounted to
approximately $137.0 million in fiscal 1997 as compared to approximately
$124.3 million in fiscal 1996 and approximately $123.9 million in fiscal
1995. This represents an increase of approximately 10.3% comparing
fiscal 1997 to fiscal 1996 and approximately a 0.3% increase comparing
fiscal 1996 to fiscal 1995. The increase in fiscal 1997 principally is
attributable to a higher level of policyholder account balances as a
result of the increase in annuity sales.
The Insurance Company's average credited rates for reserves and
account balances for the 12 months ended December 31, 1997, 1996 and
1995 were less than the Company's ratio of net investment income to mean
assets for the same periods as noted above under "Net Investment
Income." Although management does not currently expect material
declines in the spread between the Company's average credited rate for
reserves and account balances and the Company's ratio of net investment
income to mean assets (the "Spread"), there can be no assurance that the
Spread will not decline in future periods or that such decline will not
have a material adverse effect on the Company's financial condition and
results of operations. Depending, in part, upon competitive factors
affecting the industry in general, and the Company, in particular, the
Company may, from time to time, adjust the average credited rates on
certain of its products. There can be no assurance that the Company
will reduce such rates or that any such reductions will broaden the Spread.
Interest Expense on Notes Payable
The interest expense on the Company's notes payable amounted to
approximately $5.85 million in fiscal 1997, approximately $5.0 million
in fiscal 1996 and approximately $5.0 million in fiscal 1995. The
increase in interest expense in fiscal 1997 is attributable to the
increase in the Company's short term note payable.
General Expenses, Taxes and Commissions
General expenses, taxes and commissions to agents totaled
approximately $17.2 million in fiscal 1997 as compared to approximately
$17.2 million in fiscal 1996 and approximately $15.0 million in fiscal
1995. This represents approximately no increase comparing fiscal 1997
to fiscal 1996 and approximately a 14.7% increase comparing fiscal 1996
to fiscal 1995. The increase in fiscal 1996 compared to fiscal 1995 is
primarily attributable to higher professional fees related to the
potential acquisition of Fidelity. In fiscal 1997 compared to fiscal
1996 commissions and related expenses increased as a result of an
increase in sales of single premium deferred annuities which was offset
by lower professional fees in fiscal 1997.
Deferred Policy Acquisition Costs
The change in the net DAC for fiscal 1997 resulted in a credit of
approximately $2.9 million, as compared to a charge of approximately
$850 thousand in fiscal 1996 and credit of approximately $460 thousand
in fiscal 1995. Such changes are due to the effect of revisions to
estimated gross profits on unamortized deferred acquisition costs which
are reflected in the year such estimated gross profits are revised.
Income Before Income Taxes
For the reasons discussed above, income before income taxes
amounted to approximately $90.6 million in fiscal 1997, as compared to
approximately $76.4 million in fiscal 1996 and approximately $56.4
million in fiscal 1995.
Income Taxes
Income tax expense (benefit) was approximately $29.3 million for
fiscal 1997, as compared to approximately $21.8 million in fiscal 1996
and approximately $7.3 million in fiscal 1995. The increase in income
taxes in fiscal 1997 is primarily attributable to higher income from
operations and realized capital gains during fiscal 1997. In addition,
as a result of the finalization of the Company's 1994 federal income tax
return, the federal income tax recoverable from operations and capital
loss carryback recorded at December 31, 1994 was increased in fiscal
1995 by $3.1 million which reduced income tax expense by a similar amount.
Net Income
For the reasons discussed above, the Company had net income of
approximately $61.3 million in fiscal 1997, net income of approximately
$54.5 million in fiscal 1996 and net income of approximately $49.1
million in fiscal 1995.
Liquidity and Capital Resources
The Company is an insurance holding company and its primary uses of
cash are debt service obligations, operating expenses and dividend
payments. The Company's principal sources of cash are dividends from
the Insurance Company, sales of and interest on the Company's
investments and rent from its real estate. During the third quarter of
1997, the Company's Board of Directors increased the quarterly dividend
rate to $.06 per share. During 1997 and 1996, the Company purchased and
retired 372,300 and 724,000 shares of common stock, respectively. The
Company is authorized to purchase an additional 232,000 shares of common
stock. At the February 1998 Board of Directors meeting, the Company was
authorized to purchase an additional 1,000,000 shares of common stock.
The Insurance Company is subject to various regulatory restrictions
on the maximum amount of payments, including loans or cash advances,
that it may make to the Company without obtaining prior regulatory
approval. As a New York domiciled insurance company, the Insurance
Company is subject to restrictions on the payment of dividends under New
York law. New York law states that no domestic stock life insurance
company shall distribute any dividend to its shareholders unless a
notice of its intention to declare such dividend and the amount thereof
shall have been filed with the Superintendent not less than 30 days in
advance of such proposed declaration. The Superintendent may disapprove
such distribution by giving written notice to such company within 30
days after such filing that he or she finds that the financial condition
of the company does not warrant such distribution. The NYSDI has
established informal guidelines for the Superintendent's findings which
focus upon, among other things, the overall financial condition and
profitability of the insurer under statutory accounting practices. During
fiscal 1997, 1996, and 1995, the Insurance Company paid dividends of
$24.8 million, $15 million and $5 million, respectively, to the Company.
Principal sources of funds at the Insurance Company are premiums
and other considerations paid, net investment income received and
proceeds from investments called, redeemed or sold. The principal uses
of these funds are the payment of benefits on annuity contracts and life
insurance policies, (including withdrawals and surrender payments), the
payment of policy acquisition costs, operating expenses and the purchase
of investments.
Net cash provided by the Company's operating activities (reflecting
principally: (I) premiums and contract charges collected less (ii)
benefits paid on life insurance and annuity products plus (iii) income
collected on invested assets less (iv) commissions and other general
expenses paid) was approximately $47.3 million, $43.9 million and $30.2
million in fiscal 1997, 1996 and 1995, respectively. Net cash (used in)
provided by the Company's investing activities (principally reflecting
investments purchased less investments called, redeemed or sold) was
approximately $(62.5) million, $(63.7) million and $(162.7) million in
fiscal 1997, 1996 and 1995, respectively.
For purposes of the Company's consolidated statements of cash
flows, financing activities relate primarily to "dollar roll" repurchase
transactions, and to sales and surrenders of the Company's annuity and
universal life insurance products. The payment of dividends by the
Company to its stockholders also is considered to be a financing
activity. Net cash provided by (used in) the Company's financing
activities amounted to approximately $27.9 million, $22.4 million and
$131.4 million in fiscal 1997, 1996 and 1995, respectively. These
fluctuations primarily are attributable to the net change in "dollar
roll" repurchase transactions, higher policyholder account balances, and
an increase in borrowings under the Company's line of credit during
fiscal 1997.
The Company currently has one bank line of credit for $25 million
of which $20 million was used at December 31, 1997.
The Indenture governing the Senior Notes contains financial
covenants which, among other things, restrict the ability of the Company
to incur additional indebtedness, create or permit liens, effect certain
asset sales and engage in certain mergers or similar transactions.
Management believes that the Company currently is in compliance with
these covenants and restrictions contained in the Indenture and,
further, that compliance with these covenants and restrictions will not
have a material adverse effect on the Company's financial condition or
results of operations.
Given the Insurance Company's historic cash flow and current
financial results, management believes that, for the next twelve months
and for the reasonably foreseeable future, the Insurance Company's cash
flow from operating activities will provide sufficient liquidity for the
operations of the Insurance Company, as well as provide sufficient funds
to the Company, so that the Company will be able to make dividend
payments, as described in "Item 5 - Market for the Registrant's Common
Equity and Related Shareholder Matters," satisfy its debt service
obligations and pay its other operating expenses.
Capital expenditures during fiscal 1997 were approximately
$409,000. As of December 31, 1997, the Company had no outstanding
commitments for significant capital expenditures.
To meet its anticipated liquidity requirements, the Company
purchases investments taking into account the anticipated future cash
flow requirements of its underlying liabilities. In managing the
relationship between assets and liabilities, the Company analyzes the
cash flows necessary to correspond with the expected cash needs on the
underlying liabilities under various interest rate scenarios. In
addition, the Company invests a portion of its total assets in short-term
investments (approximately 10.32%, 9.97% and 8.2% as of December 31,
1997, 1996 and 1995, respectively). The weighted average duration
of the Company's debt portfolio was approximately six years as of
December 31, 1997. The Company's fixed maturity investments are all
classified as available for sale and includes those securities available
to be sold in response to, among other things, changes in market
interest rates, changes in the security's prepayment risk, the Company's
need for liquidity and other similar factors. These investments are
carried at estimated market value, and unrealized gains (losses), net of
federal income taxes and deferred policy acquisition costs, if any, are
charged directly to shareholders' equity, unless a decline in market
value is considered to be other than temporary, in which event the
Company recognizes a loss. Equity securities include common stocks and
non-redeemable preferred stocks and are carried at market, with the
related unrealized gains and losses, net of federal income taxes, if
any, charged or credited directly to shareholders' equity, unless a
decline in market value is considered to be other than temporary, in
which event the Company recognizes a loss.
The Insurance Company is subject to Regulation 130 adopted and
promulgated by the NYSDI. Under this Regulation, the Insurance
Company's ownership of below investment grade debt securities is limited
to 20.0% of total admitted assets, as calculated under statutory
accounting practices. As of December 31, 1997 and 1996, approximately
5.4% and 5.4%, respectively of the Insurance Company's total admitted
assets were invested in below investment grade debt securities.
The Company maintains a portfolio which includes below investment
grade securities which were purchased to achieve a more favorable
investment yield, all of which are classified as available for sale and
reported at estimated market value. As of December 31, 1997 and 1996,
the carrying value of these securities was approximately $164.6 million
and $119.8 million, respectively (representing approximately 6.4% and
5.0%, respectively of the Company's total assets and 32.8% and 28.3%,
respectively of shareholders' equity).
Investments in below investment grade debt securities have
different risks than investments in corporate debt securities rated
investment grade. Risk of loss upon default by the borrower is
significantly greater with respect to below investment grade debt
securities than with respect to other corporate debt securities because
below investment grade debt securities generally are unsecured and often
are subordinated to other creditors of the issuer. Also, issuers of
below investment grade debt securities usually have high levels of
indebtedness and often are more sensitive to adverse economic
conditions, such as recession or increasing interest rates, than are
investment grade issuers. Typically, there is only a thinly traded
market for such securities and recent market quotations may not be
available for some of these securities. Market quotes generally are
available only from a limited number of dealers and may not represent
firm bids of such dealers or prices for actual sales. The Company
attempts to reduce the overall risk in its below investment grade
portfolio, as in all of its investments, through careful credit
analysis, investment policy limitations, and diversification by company
and by industry. Below investment grade debt investments, as well as
other investments, are being monitored on an ongoing basis.
In certain situations, the terms of some fixed maturity assets are
restructured or modified. There were no restructured fixed maturities
at December 31, 1997.
As of December 31, 1997, approximately 8.4% of the Company's total
invested assets were invested in limited partnerships. Pursuant to
NYSID regulations, the Company's investments in equity securities,
including limited partnership interests, may not exceed 20% of the
Insurance Company's invested assets. Investments in limited
partnerships are included in the Company's consolidated balance sheet
under the heading "Other invested assets." See "Note 2 to the Notes to
Consolidated Financial Statements." The Company is committed, if called
upon during a specified period, to contribute an aggregate of
approximately $73.7 million of additional capital to certain of these
limited partnerships. However, management does not expect this entire
amount to be called because certain of these limited partnerships are
nearing the end of the period during which investors are required to
make contributions. The Company may make selective investments in
additional limited partnerships as opportunities arise. In general,
risks associated with such limited partnerships include those related to
their underlying investments (i.e., equity securities, debt securities
and real estate), plus a level of illiquidity, which is mitigated by the
ability of the Company to take annual distributions of partnership
earnings. There can be no assurance that the Company will continue to
achieve the same level of returns on its investments in limited
partnerships as it has historically or that the Company will achieve any
returns on such investments at all. Further, there can be no assurance
that the Company will receive a return of all or any portion of its
current or future capital investments in limited partnerships. The
failure of the Company to receive the return of a material portion of
its capital investments in limited partnerships, or to achieve historic
levels of return on such investments, could have a material adverse
effect on the Company's financial condition and results of operations.
As previously discussed, in fiscal 1997 and 1996 the Company
participated in "dollar roll" repurchase agreement transactions.
Amounts outstanding to repurchase securities under such agreements were
approximately $205.2 million and $200.9 million at December 31, 1997 and
1996, respectively. The Company may engage in selected "dollar roll"
transactions as market opportunities arise.
As part of a proposed rehabilitation plan for Fidelity Mutual Life
Insurance Company ("Fidelity"), on January 11, 1995 the Insurance
Company signed a definitive purchase agreement with the Pennsylvania
Insurance Commissioner and Fidelity to invest up to $45 million for a
minority (49.9%) stake in a Fidelity subsidiary insurance holding
company. In addition, the Company had agreed to purchase $25 million of
Senior Notes of such company.
The Company was informed by the Pennsylvania Insurance Commissioner
that in response to the significant improvement in the invested assets
of Fidelity, she reopened the process to select an equity investor for
the recapitalization and rehabilitation of Fidelity.
The Company disagreed with the Insurance Commissioner's actions and
commenced litigation which was settled in the second quarter of fiscal
1997. As part of the settlement, the Company received $1.7 million.
All 50 states of the United States, the District of Columbia and
Puerto Rico have insurance guaranty fund laws requiring all life
insurance companies doing business within the jurisdictions to
participate in guaranty associations, which are organized to pay
contractual obligations under insurance policies (and certificates
issued under group insurance policies) issued by impaired or insolvent
life insurance companies. These associations levy assessments (up to
prescribed limits) on all member insurers in a particular state on the
basis of the proportionate share of the premiums written by member
insurers in the lines of business in which the impaired or insolvent
insurer is engaged. Some states permit member insurers to recover
assessments paid through full or partial premium tax offsets. These
assessments may be deferred or forgiven under most guaranty laws if they
would threaten an insurer's solvency. The amount of these assessments
in prior years has not been material, however, the amount and timing of
any future assessment on the Insurance Company under these laws cannot
be reasonably estimated and are beyond the control of the Company and
the Insurance Company. Recent failures of substantially larger
insurance companies could result in future assessments in material amounts.
See "Item 1 - Business - Insurance Regulation" for a description of
certain NAIC initiatives that also may impact the Company's financial
condition and results of operations.
Year 2000 Matters
The Company initiated the process of preparing its computer systems
and applications for the Year 2000 in 1994. This process involves
modifying or replacing certain hardware and software maintained by the
Company as well as communicating with external service providers to
ensure that they are taking the appropriate action to remedy their Year
2000 issues. The modification process of all significant applications
will be completed by December 31, 1998. Management expects to have
substantially all of the system and application changes completed during
the second half of 1999.
Purchased hardware will be capitalized in accordance with normal
policy. Personnel and all other costs related to the project are being
expensed as incurred. The total cost to the Company of these Year 2000
compliance activities has not been and is not anticipated to be material
to its financial position or results of operations in any given year.
The costs of the project and the expected completion dates are
based on management's best estimates.
Effects of Inflation and Interest Rate Changes
Management does not believe that inflation has had a material
adverse effect on the Company's consolidated results of operations. The
Company seeks to manage its investment portfolio in part to reduce its
exposure to interest rate fluctuations. In general, the market value of
the Company's fixed maturity portfolio increases or decreases in an
inverse relationship with fluctuations in interest rates, and the
Company's net investment income increases or decreases in direct
relationship with interest rate changes. For example, if interest rates
decline, the Company's fixed maturity investments generally will
increase in market value, while net investment income will decrease as
fixed income investments mature or are sold and proceeds are reinvested
at the declining rates, and vice versa. Management is aware that
prevailing market interest rates frequently shift and, accordingly, the
Company has adopted strategies which are designed to address either an
increase or decrease in prevailing rates. In a rising interest rate
environment, the Company's average cost of funds would be expected to
increase over time as it prices its new and renewing annuities to maintain
a generally competitive market rate. Concurrently, the Company would
attempt to place new funds in investments which were matched in duration
to, and higher yielding than, the liabilities associated with such
annuities. Management believes that liquidity necessary in such an interest
rate environment to fund withdrawals, including surrenders, would be
available through income, cash flow, the Company's cash reserves or from
the sale of short-term investments. In a declining interest rate
environment, the Company's cost of funds would be expected to decrease over
time, reflecting lower interest crediting rates on its fixed annuities.
Should increased liquidity be required for withdrawals in such an
interest rate environment, management believes that the portion of the
Company's investments which are designated as available for sale in the
Company's consolidated balance sheet could be sold without materially
adverse consequences in light of the general strengthening in market prices
which would be expected in the fixed maturity security market.
Interest rate changes also may have temporary effects on the sale
and profitability of the universal life and annuity products offered by
the Company. For example, if interest rates rise, competing investments
(such as annuity or life insurance products offered by the Company's
competitors, certificates of deposit, mutual funds and similar
instruments) may become more attractive to potential purchasers of the
Company's products until the Company increases the rates credited to
holders of its universal life and annuity products. In contrast, as
interest rates fall, the Company attempts to lower its credited rates to
compensate for the corresponding decline in its net investment income.
As a result, changes in interest rates could materially adversely effect
the financial condition and results of operations of the Company
depending on the attractiveness of alternative investments available to
the Company's customers. In that regard, in the current interest rate
environment, the Company has attempted to maintain its credited rates at
competitive levels which are designed to discourage surrenders and which
may be considered attractive to purchasers of new annuity products. In
addition, because the level of prevailing interest rates impacts the
Company as well as its competition, management does not believe that the
low interest rate environment has materially affected the Company's
competitive position vis a vis other life insurance companies that
emphasize the sale of annuity products. Notwithstanding the foregoing,
if interest rates continue at current levels or decline further, there
can be no assurance that this segment of the life insurance industry,
including the Company, would not experience increased levels of
surrenders and reduced sales and thereby be materially adversely affected.
Forward Looking Information
The Company cautions readers regarding certain forward-looking
statements contained in this report and in any other statements made by,
or on behalf of, the Company, whether or not in future filings with the
Securities and Exchange Commission (the "SEC"). Forward-looking
statements are statements not based on historical information and which
relate to future operations, strategies, financial results, or other
developments. Statements using verbs such as "expect," "anticipate,"
"believe" or words of similar import generally involve forward-looking
statements. Without limiting the foregoing, forward-looking statements
include statements which represent the Company's beliefs concerning
future levels of sales and redemptions of the Company's products,
investment spreads and yields, or the earnings and profitability of the
Company's activities.
Forward-looking statements are necessarily based on estimates and
assumptions that are inherently subject to significant business,
economic and competitive uncertainties and contingencies, many of which
are beyond the Company's control and many of which are subject to
change. These uncertainties and contingencies could cause actual
results to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company. Whether or not actual
results differ materially from forward-looking statements may depend on
numerous foreseeable and unforeseeable developments. Some may be
national in scope, such as general economic conditions, changes in tax
law and changes in interest rates. Some may be related to the insurance
industry generally, such as pricing competition, regulatory developments
and industry consolidation. Others may relate to the Company
specifically, such as credit, volatility and other risks associated with
the Company's investment portfolio. The Company disclaims any
obligation to update forward-looking information.
Recent Accounting Pronouncements
In December 1996, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125." SFAS No. 127 amends SFAS No. 125
by deferring for one year the effective date of paragraph 15 of SFAS No.
125, addressing secured borrowings and collateral, and for repurchase
agreement, dollar roll, security lending and similar transactions, of
paragraphs 9 through 12 and 237(b) of SFAS No. 125. SFAS No. 127 is
effective for certain transactions occurring after December 31, 1997,
and must be applied prospectively. Management is evaluating the impact
of SFAS 125 and 127 on the Company.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130), which
establishes standards for displaying comprehensive income and its
components in a full set of general-purpose financial statements. SFAS
130 is effective for fiscal years beginning after December 15, 1997.
Also in June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 131 establishes
standards for reporting information about operating segments in annual
financial statements and requires reporting selected information about
operating segments in interim financial reports issued to shareholders.
SFAS 131 is effective for fiscal years beginning after December 15,
1997. The Company's current definition of its operating segments will
not change.
Item 8. Financial Statements and Supplementary Data
See the accompanying Table of Contents to Consolidated Financial
Statements and Schedules on Page F-1.
Item 9. Changes in and Disagreements with Accountants On Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
The information relating to the Company's directors, nominees for
election as directors and executive officers will be included in the
Company's definitive Proxy Statement for its 1998 Annual Meeting of
Shareholders (the "Proxy Statement"), which the Company intends to file
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended, not later than 120 days after the end of the fiscal year
covered by this Annual Report on Form 10-K, under the heading "Directors
and Executive Officers' and is incorporated herein by reference.
Item 11. Executive Compensation
The information relating to compensation paid to executive officers
and directors of the Company will be included in the Proxy Statement
under the heading "Compensation of Directors and Executive Officers" and
is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information relating to the security ownership of certain
beneficial owners and management of the Company will be included in the
Proxy Statement under the heading "Security Ownership of Certain
Beneficial Owners and Management" and is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
Relationship with Pensions for Business
Jacques Sartisky, a director of the Company until his death in
December of 1995, was the President and principal owner (up until the
beginning of fiscal 1995) of Pensions for Business, Inc., a life
insurance agency. For the fiscal years ended December 31, 1997, 1996
and 1995, approximately 0%, 0% and 11.5%, respectively of the Company's
total insurance revenues were attributable to sales through Pensions for
Business. For the fiscal years ended December 31, 1997, 1996 and 1995,
aggregate commissions and other remuneration to Pensions for Business
were approximately $24,721, $32,283 and $181,011, respectively.
Management believes that the Company's transactions with Pensions for
Business were made on terms at least as fair to the Company as could be
obtained from unaffiliated third parties. Compensation of agents is
strictly regulated by the New York State Department of Insurance.
Purchases of Annuity Contracts and Life Insurance Policies
From time to time in the ordinary course of business, certain of
the Company's directors and executive officers have purchased, and may
in the future, purchase annuity contracts or life insurance policies
from the Insurance Company. Such transactions in the past have been,
and will in the future be, on terms no less favorable to the Insurance
Company than those that could be obtained from unaffiliated third
parties. In that regard, since January 1, 1995, directors and executive
officers, have engaged in the following transactions with the Insurance
Company: Herbert Kurz, the President and a director of the Company,
purchased annuity contracts for $200,000, $300,000 and $500,000 during
the fiscal years ended December 31, 1997, 1996 and 1995, respectively.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a). The Independent Auditors' Report, Consolidated Financial
Statements and Consolidated Financial Statement Schedules listed in the
Table of Contents on page F-1 are being filed as part of this Form 10-K.
(b). During the last quarter of the fiscal year ended December 31,
1997 the Company did not file a current report on Form 8-K.
(c). Exhibit Index
Exhibit
Number Description of Document
2.01 Certificate of Ownership and Merger, as filed
with the Secretary of State of Delaware on
July 27, 1993
2.02 Certificate of Merger, as filed with the
Secretary of State of State of New York on
July 27, 1993
3.01 Certificate of Amendment of the Certificate of
Incorporation of the Company, as filed with
the Secretary of State of State of New York on
June 8, 1993
3.02 Certificate of Correction of the Certificate
of Amendment to the Certificate of
Incorporation of the Company, as filed with
the Secretary of State of State of New York on
June 29, 1993
3.03 Certificate of Incorporation of Presidential
Life Corporation, a Delaware corporation (now
the Company)
3.04 By-Laws of Presidential Life Corporation, a
Delaware corporation (now the Company)
4.01 Form of Indenture dated as of December 15,
1993 between the Registrant and M&T Bank
relating to the 9 1/2% Senior Notes due 2000
10.01 Reinsurance Agreements, dated January 1,
1969, March 1, 1979 and November 15,
1980, in each case together with all
amendments thereto, Between the
Registrant and Life Reassurance
Corporation of America (formerly known as
General Reassurance Corporation)
10.02 Reinsurance Agreements, dated September
25, 1969 and November 21, 1980, in each
case together with all amendments
thereto, by and between Presidential Life
Insurance Company and Security Benefit
Life Insurance Company
10.03 Form of Indemnification Agreement
10.04 Presidential Life Corporation 1984 Stock Option Plan
10.05 Presidential Life Corporation 1996 Stock Incentive Plan
11.01 Statement Re Computation of Per Share
Earnings is clearly determinable from the
information contained in this Form 10-K
21.01 Subsidiaries of the Registrant
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PRESIDENTIAL LIFE CORPORATION
By /s/ Herbert Kurz
Herbert Kurz
Principal Executive Officer and Director
Date: March 20, 1998
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated:
Date: March 20, 1998 /s/ Herbert Kurz
Herbert Kurz
Principal Executive Officer
and Director
Date: March 20, 1998 /s/ Michael V. Oporto
Michael V. Oporto, Chief
Financial Officer and Principal
Accounting Officer
Date: March 20, 1998 /s/ Peter A. Cohen
Peter A. Cohen Director
Date: March 20, 1998 /s/ Jules Kroll
Jules Kroll Director
Date: March 20, 1998 /s/ Lawrence Rivkin
Lawrence Rivkin Director
Date: March 20, 1998 /s/ Morton B. Silberman
Morton B. Silberman Director
TABLE OF CONTENTS TO
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page
Independent Auditors' Report...................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and 1996.... F-3
Consolidated Statements of Income - Years Ended December 31,
1997, 1996 and 1995.......................................... F-4
Consolidated Statements of Shareholders' Equity - Years Ended
December 31, 1997, 1996 and 1995............................. F-5
Consolidated Statements of Cash Flows - Years Ended December 31,
1997, 1996 and 1995.......................................... F-6
Notes to Consolidated Financial Statements........................ F-7
Consolidated Financial Statement Schedules:
II Condensed Balance Sheets (Parent Company Only)............... S-1
II Condensed Statements of Income (Parent Company
Only)...................................................... S-2
II Condensed Statements of Cash Flows (Parent
Company Only).............................................. S-3
III Supplemental Insurance Information........................... S-4
IV Reinsurance.................................................. S-5
All schedules not included are omitted because they are either not
applicable or because the information required therein is included in
Notes to Consolidated Financial Statements.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Presidential Life Corporation
Nyack, New York 10960
We have audited the accompanying consolidated balance sheets of
Presidential Life Corporation and subsidiaries ("the Company") as of
December 31, 1997 and 1996 and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years
in the period ended December 31, 1997. Our audits also included the
financial statement schedules listed in the foregoing Table of Contents.
These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of
December 31, 1997 and 1996 and the results of their operations and their
cash flows for each of the three years in the period ended December 31,
1997 in conformity with generally accepted accounting principles. Also,
in our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
New York, New York
February 12, 1998
<TABLE>
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31
1997 1996
<S> <C> <C>
ASSETS:
Investments:
Fixed maturities:
Available for sale $1,909,924 $1,823,349
Common stocks 45,773 42,059
Mortgage Loans 17,865 18,622
Real Estate 417 426
Policy Loans 18,120 18,068
Short-term investments 264,098 240,038
Other invested assets 208,162 176,103
Total investments 2,464,359 2,318,665
Cash and cash equivalents 13,480 819
Accrued investment income 28,167 32,474
Deferred policy acquisition costs 37,685 39,783
Furniture and equipment, net 567 329
Amounts due from reinsurers 8,249 7,775
Other assets 1,222 1,532
Assets held in separate account 4,612 5,548
TOTAL ASSETS $2,558,341 $2,406,925
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Policy Liabilities:
Policyholders' account balances $1,280,900 $1,260,545
Future policy benefits:
Annuity 380,109 365,321
Life and accident and health 50,848 49,859
Other policy liabilities 3,124 2,690
Total policy liabilities 1,714,981 1,678,415
Dollar repurchase agreements 205,202 200,883
Notes payable 50,000 50,000
Short term note payable 20,000 5,000
Deposits on policies to be issued 2,436 1,270
Deferred federal income taxes 46,575 31,649
General expenses and taxes accrued 7,074 7,294
Other liabilities 4,807 3,803
Liabilities related to separate account 4,612 5,548
Total liabilities 2,055,687 1,983,862
Shareholders' Equity:
Capital stock ($.01 par value, authorized
100,000,000 shares, issued and outstanding
32,621,549 shares in 1997 and 32,992,835
shares in 1996) 326 330
Additional paid-in-capital 18,274 24,023
Net unrealized investment gains 71,540 40,294
Retained earnings 412,514 358,416
Total Shareholders' Equity 502,654 423,063
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $2,558,341 $2,406,925
The accompanying notes are an integral part of these Consolidated
Financial Statements.
</TABLE>
<TABLE>
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
Years Ended December 31
1997 1996 1995
<S> <C> <C> <C>
REVENUES:
Insurance revenues:
Premiums $ 3,976 $ 4,244 $ 4,408
Annuity considerations 19,655 8,461 3,780
Universal life and investment
type policy fee income 1,988 2,090 1,934
Net investment income 191,818 186,180 170,780
Realized investment gains 26,039 20,020 17,216
Other income 4,228 2,679 1,746
TOTAL REVENUES 247,704 223,674 199,864
BENEFITS AND EXPENSES:
Death and other life insurance
benefits 7,236 6,887 7,366
Annuity benefits 37,867 36,510 36,016
Interest credited to policyholders'
account balances 76,202 75,252 78,802
Interest expense on notes payable 5,850 5,049 5,045
Other interest and other charges 445 330 427
Increase (decrease) in liability for
future policy benefits 15,248 5,281 1,312
Commissions to agents, net 4,357 3,215 3,025
General expenses and taxes 12,813 13,944 11,940
Decrease (increase) in deferred
policy acquisition costs (2,872) 849 (459)
TOTAL BENEFITS AND
EXPENSES 157,146 147,317 143,474
Income before income taxes 90,558 76,357 56,390
Provision (benefit) for income taxes:
Current 31,165 23,199 9,495
Deferred (1,899) (1,363) (2,163)
29,266 21,836 7,332
NET INCOME $ 61,292 $ 54,521 $ 49,058
Weighted average number of shares
outstanding during the year 32,734,733 33,184,294 33,631,719
Earnings per common share $ 1.87 $ 1.64 $ 1.46
The accompanying notes are an integral part of these Consolidated Financial
Statements.
</TABLE>
<TABLE>
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
Net
Additional Unrealized
Capital Paid-in- Investment Retained
Stock Capital Gains (Losses) Earnings Total
<S> <C> <C> <C> <C> <C>
Balance at
January 1,
1995 $337 $31,751 $ (39,463) $263,328 $255,953
Net income 49,058 49,058
Increase in
Unrealized
Investment
Gains, Net 101,195 101,195
Purchase and
Retirement
of Stock (2) (1,704) (1,706)
Issuance of
Shares under
Stock Option
Plan 83 83
Dividends
Paid to
Shareholders
($.105 per
share) (3,523) (3,523)
Balance at
December 31,
1995 335 30,130 61,732 308,863 401,060
Net income 54,521 54,521
Change in
Unrealized
Investment
Gains, Net (21,438) (21,438)
Purchase and
Retirement
of Stock (7) (7,031) (7,038)
Issuance of
Shares under
Stock Option
Plan 2 924 926
Dividends
Paid to
Shareholders
($.15 per
share) (4,968) (4,968)
Balance at
December 31,
1996 330 24,023 40,294 358,416 423,063
Net income 61,292 61,292
Change in
Unrealized
Investment
Gains, Net 31,246 31,246
Purchase and
Retirement
of Stock (4) (5,758) (5,762)
Issuance of
Shares under
Stock Option
Plan 9 9
Dividends
Paid to
Shareholders
($.22 per
share) (7,194) (7,194)
Balance at
December 31,
1997 $326 $18,274 $ 71,540 $412,514 $502,654
The accompanying notes are an integral part of these Consolidated Financial
Statements.
</TABLE>
<TABLE>
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
1997 1996 1995
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 61,292 $ 54,521 $ 49,058
Adjustments to reconcile net income
to net cash provided by operating
activities:
Benefit for deferred income taxes (1,899) (1,363) (2,163)
Depreciation and amortization 474 439 499
Net accrual of discount on fixed
maturities (4,181) (1,184) (1,108)
Realized investment gains (26,039) (20,020) (17,216)
Changes in:
Accrued investment income 4,307 1,854 (11,531)
Deferred policy acquisition costs (2,872) 849 (459)
Federal income tax recoverable 0 477 8,657
Liability for future policy
benefits 15,777 5,689 1,588
Other items 436 2,612 2,911
Net Cash Provided by
Operating Activities 47,295 43,928 30,241
INVESTING ACTIVITIES:
Fixed Maturities:
Available for Sale:
Acquisitions (338,058) (302,778) (326,630)
Sales 29,325 13,713 44,453
Maturities, calls and repayments 252,383 259,108 90,147
Common Stocks:
Acquisitions (18,722) (15,663) (25,087)
Sales 68,377 54,369 73,449
Decrease (increase) in short term
investments and policy loans (24,112) (46,884) (62,357)
Other Invested Assets:
Additions to other invested assets (110,760) (62,045) (31,655)
Distributions from other invested
assets 78,701 36,274 23,812
Purchase of property and equipment (409) (154) (41)
Mortgage loan on real estate 757 393 (1,392)
Amounts due from security transactions 0 0 52,588
Net Cash Used in
Investing Activities (62,518) (63,667) (162,713)
FINANCING ACTIVITIES:
Proceeds from Dollar Repurchase
Agreements 2,429,540 2,308,967 1,670,600
Repayment of Dollar Repurchase
Agreements (2,425,221) (2,268,500) (1,549,547)
Proceeds from line of credit 15,000 5,000 0
Increase (decrease) in
policyholders'account balances 20,355 (9,353) 14,207
Repurchase of common stock (5,762) (7,038) (1,706)
Deposits on policies to be issued (1,166) (1,677) 1,342
Dividends paid to shareholders (7,194) (4,967) (3,526)
Net Cash Provided by
Financing Activities 27,884 22,432 131,370
Increase (Decrease) in Cash and Cash
Equivalents 12,661 2,693 (1,102)
Cash and Cash Equivalents at Beginning
of Year 819 (1,874) (772)
Cash and Cash Equivalents at End
of Year $ 13,480 $ 819 $ (1,874)
Supplemental Cash Flow Disclosure:
Income Taxes Paid $ 27,700 $ 27,303 $ 6,887
Interest Paid $ 5,508 $ 4,750 $ 4,750
The accompanying notes are an integral part of these Consolidated Financial
Statements.
</TABLE>
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Business
Presidential Life Corporation ("the Company"), through its
wholly-owned subsidiary Presidential Life Insurance Company ("the
Insurance Company"), is engaged in the sale of life insurance and
annuities.
B. Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been
prepared in conformity with generally accepted accounting principles
("GAAP"). Intercompany transactions and balances have been eliminated
in consolidation. Certain amounts have been reclassified to conform to
the current year's presentation. The preparation of financial
statements in conformity with generally accepted accounting principles
requires that management make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
C. Investments
Fixed maturity investments available for sale represent
investments which may be sold in response to changes in various economic
conditions. These investments are carried at estimated market value and
net unrealized gains (losses), net of the effects of amortization of
deferred policy acquisition costs and deferred Federal income taxes are
credited or charged directly to shareholders' equity, unless a decline
in market value is considered to be other than temporary in which case
the investment is reduced to its net realizable value. Equity
securities include common stocks and non-redeemable preferred stocks and
are carried at estimated market, with the related unrealized gains and
losses, net of deferred income tax effect, if any, charged or credited
directly to shareholders' equity, unless a decline in market value is
deemed to be other than temporary in which case the investment is
reduced to its net realizable value.
"Other invested assets" are recorded at the lower of cost or
market, or equity as appropriate, and primarily include interests in
limited partnerships, which principally are engaged in real estate,
international opportunities, acquisitions of private growth companies,
debt restructuring and merchant banking. In general, risks associated
with such limited partnerships include those related to their underlying
investments (i.e., equity securities, debt securities and real estate),
plus a level of illiquidity,, which is mitigated by the ability of the
Company to take annual distributions of partnership earnings. To
evaluate the appropriateness of the carrying value of a limited
partnership interest, management maintains ongoing discussions with the
investment manager and considers the limited partnership's operation,
its current and near term projected financial condition, earnings
capacity, and distributions received by the Company during the year.
Because it is not practicable to obtain an independent valuation for
each limited partnership interest, for purposes of disclosure the market
value of a limited partnership interest is estimated at book value.
Management believes that the net realizable value of such limited
partnership interests, in the aggregate, exceeds their related carrying
value as of December 31, 1997 and 1996. As of December 31, 1997, the
Company was committed to contribute, if called upon, an aggregate of
approximately $73.7 million of additional capital to certain of these
limited partnerships.
In evaluating whether an investment security or other
investment has suffered an impairment in value which is deemed to be
"other than temporary", management considers all available evidence.
When a decline in the value of an investment security or other
investment is considered to be other than temporary, the investment is
reduced to its net realizable value, (which contemplates the price that
can be obtained from the sale of such asset in the ordinary course of
business) which becomes the new cost basis. The amount of reduction is
recorded as a realized loss. A recovery from the adjusted cost basis is
recognized as a realized gain only at sale.
The Company participates in "dollar roll" repurchase agreement
transactions to enhance investment income. Dollar roll transactions
involve the sale of certain mortgage backed securities to a holding
institution and a simultaneous agreement to purchase substantially
similar securities for forward settlement at a lower dollar price. The
proceeds are invested in short-term securities at a positive spread
until the settlement date of the similar securities. During this
period, the holding institution receives all income and prepayments for
the security. Dollar roll repurchase agreement transactions are treated
as financing transactions for financial reporting purposes.
Realized gains and losses on disposal of investments are
determined for fixed maturities and equity securities by the
specific-identification method.
Investments in short-term securities, which consist primarily
of United States Treasury Notes and corporate debt issues maturing in
less than one year, are recorded at amortized cost which approximates
market. Mortgage loans are stated at their amortized indebtedness.
Policy loans are stated at their unpaid principal balance.
The Company's investments in real estate include two buildings
in Nyack, New York, which are occupied entirely by the Company. The
investments are carried at cost less accumulated depreciation.
Depreciation has been provided on a straight line basis at the rate of
4% per annum for one building and 5% per annum for the other.
Accumulated depreciation amounted to $204,400 and $201,200 at December
31, 1997 and 1996, respectively, and related depreciation expense for
the years ended December 31, 1997, 1996 and 1995 was $3,200, $3,200 and
$3,200, respectively.
D. Furniture and Equipment
Furniture and equipment is carried at cost and depreciated on
a straight line basis over a period of five to ten years except for
automobiles which are depreciated over a period of three years.
Accumulated depreciation amounted to $219,300 and $4,100,000 at December
31, 1997 and 1996, respectively, and related depreciation expense for
each of the three years in the period ended December 31, 1997 was
$163,700, $187,200 and $192,000, respectively.
E. Recognition of Insurance Income and Related Expenses
Premiums from traditional life and annuity policies with life
contingencies are recognized generally as income over the premium paying
period. Benefits and expenses are matched with such income so as to
result in the recognition of profits over the life of the contracts.
This matching is accomplished by means of the provision for liabilities
for future policy benefits and the deferral and subsequent amortization
of policy acquisition costs.
For contracts with a single premium or a limited number of
premium payments due over a significantly shorter period than the total
period over which benefits are provided ("limited payment contracts"),
premiums are recorded as income when due with any excess profit deferred
and recognized in income in a constant relationship to insurance in
force or, for annuities, the amount of expected future benefit payments.
Premiums from universal life and investment-type contracts are
reported as deposits to policyholders' account balances. Revenues from
these contracts consist of amounts assessed during the period against
policyholders' account balances for mortality charges and surrender
charges. Policy benefits and claims that are charged to expense include
benefit claims incurred in the period in excess of related
policyholders' account balances and interest credited to policyholders'
account balances.
For the fiscal years ended December 31, 1997, 1996, and 1995,
approximately 67.3%, 78.3% and 83.5%, respectively, of premiums from
traditional life, annuity, universal life and investment-type contracts
received by the Company were attributable to sales to annuitants and
policyholders residing in the State of New York. In addition,
approximately 0%, 0% and 12.5% of the Company's total insurance revenues
from those respective years were attributable to sales through an agency
principally owned by a director of the Company until his death in
December 1995. Management believes that the Company's transactions with
such agency were made on terms at least as fair to the Company as could
be obtained from unaffiliated third parties. Compensation of agents is
strictly regulated by the New York State Department of Insurance.
F. Deferred Policy Acquisition Costs
The costs of acquiring new business (principally commissions,
certain underwriting, agency and policy issue expenses), all of which
vary with and are primarily related to the production of new business,
have generally been deferred. When a policy is surrendered, the
remaining unamortized cost is written off. Deferred policy acquisition
costs are subject to recoverability testing at time of policy issue and
loss recognition testing at the end of each fiscal year.
For immediate annuities with life contingencies, deferred
policy acquisition costs are amortized over the life of the contract, in
proportion to expected future benefit payments.
For traditional life policies, deferred policy acquisition
costs are amortized over the premium paying periods of the related
policies using assumptions that are consistent with those used in
computing the liability for future policy benefits. Assumptions as to
anticipated premiums are estimated at the date of policy issue and are
consistently applied during the life of the contracts. For these
contracts the amortization periods generally are for the scheduled life
of the policy, not to exceed 30 years.
Deferred policy acquisition costs are amortized over periods
ranging from 15 to 25 years for universal life products and
investment-type products as a constant percentage of estimated gross
profits arising principally from surrender charges and interest and
mortality margins based on historical and anticipated future experience,
updated regularly. The effects of revisions to reflect actual
experience on previous amortization of deferred policy acquisition
costs, subject to the limitation that the accrued interest on the
deferred acquisition costs balance may not exceed the amount of
amortization for the year, are reflected in earnings in the period
estimated gross profits are revised.
Unamortized deferred policy acquisition costs for the years
ended December 31, 1997 and 1996 are summarized as follows:
<TABLE>
1997 1996
(in thousands)
<S> <C> <C>
Balance at the beginning of year $39,783 $33,330
Current year's costs deferred 9,783 6,307
Total 49,566 39,637
Less, amortization for the year 6,581 7,150
Total 42,985 32,487
Change in amortization (benefit)
related to unrealized gain
(loss) in investments 5,300 (7,296)
Balance at the end of the year $37,685 $39,783
</TABLE>
G. Future Policy Benefits
Future policy benefits for traditional life insurance policies
are computed using a net level premium method on the basis of actuarial
assumptions as to mortality, persistency and interest established at
policy issue. Assumptions established at policy issue as to mortality
and persistency are based on anticipated experience which, together with
interest and expense assumptions, provide a margin for adverse
deviation. Benefit liabilities for deferred annuities during the
accumulation period are equal to accumulated contractholders' fund
balances and after annuitization are equal to the present value of
expected future payments. During the three years in the period ended
December 31, 1997, interest rates used in establishing such liabilities
range from 4.5% to 11% for life insurance liabilities and from 5.5% to
13.60% for annuity liabilities.
H. Policyholders' Account Balances
Policyholders' account balances for universal life and
investment-type contracts are equal to the policy account values. The
policy account values represent an accumulation of gross premium
payments plus credited interest less mortality and expense charges and
withdrawals.
These account balances are summarized as follows:
<TABLE>
1997 1996 1995
(in thousands)
<S> <C> <C> <C>
Account balances at beginning of year $1,260,545 $1,269,898 $1,255,691
Additions to account balances 209,568 190,559 199,510
Total 1,470,113 1,460,457 1,455,201
Deductions from account balances 189,213 199,912 185,303
Account balances at end of year $1,280,900 $1,260,545 $1,269,898
</TABLE>
Interest rates credited to account balances ranged from 4% to
12.5% in 1997, 1996 and 1995.
I. Federal Income Taxes
The Company and its subsidiaries file a consolidated Federal
income tax return. The asset and liability method in recording income
taxes on all transactions that have been recognized in the financial
statements is used. Deferred taxes are adjusted to reflect tax rates at
which future tax liabilities or assets are expected to be settled or
realized.
J. Separate Accounts
Separate Accounts are established in conformity with New York
State Insurance Law and represent funds for which investment income and
investment gains and losses accrue to the policyholders. Assets and
liabilities (stated at market value) of the Separate Account,
representing net deposits and accumulated net investment earnings less
fees, held primarily for the benefit of contractholders, are shown as
separate captions in the consolidated balance sheets.
Deposits to the Separate Account are reported as increases in
Separate Account liabilities and are not reported in revenues.
Mortality, policy administration and surrender charges to the Separate
Account are included in revenues.
K. Earnings Per Common Share
The Financial Accounting Standards Board ("FASB") issued
Statement No. 128, "Earnings Per Share" (SFAS No. 128) which specifies
the computation, presentation and disclosure requirements of earnings
per share for entities with publicly held common stock and potential
common stock. Earnings per share (EPS) presented on the face on the
consolidated income statement has been calculated to reflect the
adoption of SFAS No. 128 by the Company. Basic EPS is computed based
upon the weighted average number of common shares outstanding during the
year. Diluted EPS is computed based upon the weighted average number of
common shares including contingently issuable shares and other dilutive
items. The weighted average number of common shares used to compute
diluted EPS for the year ending December 31, 1997 was 32,736,202. The
dilution from the potential exercise of stock options outstanding did
not change basic EPS.
L. Cash and Cash Equivalents
Cash and cash equivalents includes cash on hand and amounts
due from banks with an original maturity of three months or less.
M. New Accounting Pronouncements
In December 1996, the FASB issued SFAS No. 127, "Deferral of
the Effective Date of Certain Provisions of FASB Statement No. 125."
SFAS No. 127 amends SFAS No. 125 by deferring for one year the effective
date of paragraph 15 of SFAS No. 125, addressing secured borrowings and
collateral, and for repurchase agreement, dollar roll, security lending
and similar transactions, of paragraphs 9 through 12 and 237(b) of SFAS
No. 125. SFAS No. 127 is effective for certain transactions occurring
after December 31, 1997, and must be applied prospectively. Management
is evaluating the impact of SFAS 125 and 127 on the Company.
In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130), which establishes standards for displaying comprehensive income
and its components in a full set of general-purpose financial
statements. SFAS 130 is effective for fiscal years beginning after
December 15, 1997.
Also in June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 131 establishes
standards for reporting information about operating segments in annual
financial statements and requires reporting selected information about
operating segments in interim financial reports issued to shareholders.
SFAS 131 is effective for fiscal years beginning after December 15,
1997. The Company's current definition of its operating segments will
not change.
2. INVESTMENTS
The following information summarizes the components of net
investment income and realized investment gains (losses).
<TABLE>
Net Investment Income:
Year Ended December 31
1997 1996 1995
(in thousands)
<S> <C> <C> <C>
Fixed maturities $134,740 $132,467 $128,310
Common stocks 1,341 1,315 733
Short-term investments 14,368 14,226 14,010
Other investment income 48,797 44,141 32,497
199,246 192,149 175,550
Less investment expenses 7,428 5,969 4,770
Net investment income $191,818 $186,180 $170,780
</TABLE>
The carrying value of fixed maturities which were non-income
producing for more than twelve months at December 31, 1997, 1996 and
1995 was $0 million, $0 million and $1.5 million, respectively.
<TABLE>
Realized Investment Gains (Losses):
Year Ended December 31,
1997 1996 1995
(in thousands)
<S> <C> <C> <C>
Fixed maturities $ 12,080 $ 6,735 $ 5,458
Common stocks 13,959 13,285 11,758
Total realized gains
on investments $ 26,039 $ 20,020 $ 17,216
Unrealized Investment Gains (Losses):
Year Ended December 31,
1997 1996 1995
(in thousands)
Fixed maturities $109,995 $ 61,931 $107,521
Common stocks 13,752 8,438 3,668
Unrealized investment
gains $123,747 $ 70,369 $111,189
Amortization of deferred
acquisition costs (13,686) (8,378) (16,012)
Deferred federal income
taxes (38,521) (21,697) (33,445)
Net unrealized investment
gain 71,540 40,294 61,732
Change in net unrealized
investment gains $ 31,246 $(21,438) $101,195
</TABLE>
The change in unrealized investment gains (losses) shown above
resulted primarily from changes in general economic conditions which
directly influenced investment security markets. These changes were
also impacted by writedowns of investment securities for declines in
market values deemed to be other than temporary.
The following tables provide additional information relating to
investments held by the Company:
<TABLE>
December 31, 1997:
AVAILABLE FOR SALE:
Amortized Gross Unrealized Market
Type of Investment Cost Gains Losses Value
(in thousands)
<S> <C> <C> <C> <C>
Fixed Maturities:
Bonds and Notes:
United States government
and government agencies
and authorities $ 518,997 $ 21,815 $ (256) $ 540,556
States, municipalities and
political subdivisions 26,709 3,574 0 30,283
Foreign governments 12,160 2,190 0 14,350
Public utilities 189,555 14,142 (425) 203,272
All other corporate bonds 855,347 74,441 (5,908) 923,880
Preferred stocks, primarily
corporate 197,161 8,047 (7,625) 197,583
Total Fixed Maturities: $1,799,929 $124,209 $(14,214) $1,909,924
Common Stocks $ 32,021 $ 14,202 $ (450) $ 45,773
December 31, 1996:
AVAILABLE FOR SALE:
Amortized Gross Unrealized Market
Type of Investment Cost Gains Losses Value
(in thousands)
Fixed Maturities:
Bonds and Notes:
United States government
and government agencies
and authorities $ 29,643 $ 2,287 $ (74) $ 31,856
States, municipalities and
political subdivisions 567,423 10,062 (2,354) 575,130
Foreign governments 12,014 686 0 12,700
Public utilities 221,755 4,165 (4,966) 220,954
All other corporate bonds 774,094 52,386 (9,444) 817,036
Preferred stocks, primarily
corporate 156,488 13,624 (4,439) 165,673
Total Fixed Maturities: $1,761,417 $ 83,210 $ (21,277) $1,823,349
Common Stocks $ 33,621 $ 8,993 $ (555) $ 42,059
</TABLE>
The estimated fair value of fixed maturities available for sale at
December 31, 1997, by contractual maturity, are as follows. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without penalties.
<TABLE>
Estimated Fair Value
(in thousands)
<S> <C>
Due in one year or less $ 11,410
Due after one year through five years 143,204
Due after five years through ten years 112,127
Due after ten years 1,445,600
Total debt securities 1,712,341
Preferred stock 197,583
Total $1,909,924
</TABLE>
Proceeds from sales of fixed maturities during 1997, 1996 and 1995
were $718.4 million, $757.7 million and $506.7 million, respectively.
During 1997, 1996 and 1995, respectively, gross gains of $16.4 million,
$7.3 million and $4.8 million and gross losses of $4.5 million, $7.2
million and $14.7 million were realized on those sales.
During 1996, the Company restructured or modified the terms of
certain fixed maturity investments. Certain of these restructures
included debt for equity exchanges. The fixed maturity portfolio, based
on carrying value, includes $8.6 million at December 31, 1996 of such
restructured securities. These restructures and modifications had no
significant impact on gross interest income on these fixed maturities
(which is included in net investment income). During 1997, the Company
did not restructure or modify the terms of any fixed maturity investments.
As of December 31, 1997, the Company's mortgage loans were
collateralized by commercial office buildings in New York and
Pennsylvania.
Investments in U.S. Government and Government Agencies with an
aggregate carrying value of $518,997,000 represents investments owned in
any one issuer that aggregate 10% or more of shareholders' equity as of
December 31, 1997.
As of December 31, 1997 securities with a carrying value of
approximately $5.5 million were on deposit with various state insurance
departments to comply with applicable insurance laws.
As part of a proposed rehabilitation plan for Fidelity Mutual Life
Insurance Company ("Fidelity"), on January 11, 1995 the Insurance
Company signed a definitive purchase agreement with the Pennsylvania
Insurance Commissioner and Fidelity to invest up to $45 million for a
minority (49.9%) stake in a Fidelity subsidiary insurance holding
company. In addition, the Company had agreed to purchase $25 million of
Senior Notes of such company.
The Company was informed by the Pennsylvania Insurance Commissioner
that in response to the significant improvement in the invested assets
of Fidelity, she has reopened the process to select an equity investor
for the recapitalization and rehabilitation of Fidelity. The Company
disagreed with the Insurance Commissioner's actions and commenced
litigation which was settled in the second quarter of 1997. As part of
the settlement, the Company received $1.7 million.
3. NOTES PAYABLE
Notes payable at December 31, 1997 and 1996 consist of $50 million,
9 1/2% senior notes due December 15, 2000. Interest is payable June 15
and December 15. Debt issue costs are being amortized on the interest
method over the term of the notes. As of December 31, 1997, such
unamortized costs were $874 thousand. There are no principal payments
required for the senior notes over the next three years and the total
principal is due on December 15, 2000. The senior notes are callable
after December 14, 1998.
The indenture governing the senior notes contains covenants
relating to limitations on additional indebtedness, restricted payments,
liens and sale or issuance of capital stock of the Insurance Company.
In the event the Company violates such covenants as defined in the
indenture, the Company is obligated to offer to repurchase 25% of the
outstanding principal amount of such notes. The Company believes that
it is in compliance with all of the covenants.
The short-term note payable is a bank line of credit in the amount
of $25,000,000 and provides for interest on borrowings based on market
indices. At December 31, 1997 and 1996 the Company had $20,000,000 and
$5,000,000 outstanding, respectively. The short-term note payable
outstanding at December 31, 1997 and 1996 had a weighted average
interest rate of 6.625% and 6.281%, respectively.
4. SHAREHOLDERS' EQUITY
The Company is authorized to issue 100,000,000 shares of its $.01
par value Common Stock. At December 31, 1997 32,621,549 shares were
outstanding and at December 31, 1996 32,992,835 shares were outstanding.
During the third quarter of 1997, the Company's Board of Directors
increased the quarterly dividend rate to $.06 per share. During 1997
and 1996, the Company purchased and retired 372,300 and 724,000 shares
of common stock, respectively. The Company is authorized pursuant to a
resolution of the Board of Directors to purchase an additional 232,000
shares of common stock.
Payment of dividends to the Company by the Insurance Company are
effectively restricted by the provisions of the New York Insurance Law
("Insurance Law"). All dividend payments are subject to the review and
disapproval by the New York Insurance Department. Under the New York
State Insurance Law, the New York Superintendent has broad discretion to
determine whether the financial condition of a stock life insurance
company would support the payment of dividends to its shareholders.
The New York Insurance Department has established informal
guidelines for the Superintendent's determinations which focus upon,
among other things, the overall financial condition and profitability of
the insurer under statutory accounting practices. During 1997, 1996 and
1995, the Insurance Company paid dividends of $24.8 million, $15 million
and $5 million, respectively, to the Company.
5. EMPLOYEE BENEFIT AND DEFERRED COMPENSATION PLANS
(a) Employee Retirement Plan
The Company has a noncontributory defined benefit pension plan
covering all eligible employees. The Company is both sponsor and
administrator of this plan. The plan provides for pension benefits
based on average pay and years of service. It is the Company's general
policy to fund accrued pension costs as required under ERISA. In 1997,
1996 and 1995 the Company contributed $50,000, $450,000, and $120,500,
respectively to the plan.
<TABLE>
Net pension cost included the following components:
Year Ended December 31,
1997 1996 1995
(in thousands)
<S> <C> <C> <C>
Service cost $ 436 $ 405 $ 379
Interest cost 370 330 293
Actual return on plan assets (343) (298) (293)
Other 16 11 0
Net pension cost $ 479 $ 448 $ 379
</TABLE>
<TABLE>
The funded status of the plan at December 31, 1997 and 1996 was as
follows:
December 31,
1997 1996
(in thousands)
<S> <C> <C>
Projected benefits obligation $ (5,923) $ (5,269)
Plan assets at fair value 4,558 4,444
Assets less than projected benefit (1,365) (825)
Unrecognized prior service cost 167 195
Unrecognized net gain (619) (757)
Accrued pension costs $ (1,817) $ (1,387)
Accumulated benefit obligation:
Vested $ 4,868 $ 4,259
Nonvested 8 33
$ 4,876 $ 4,292
</TABLE>
<TABLE>
The following rates were used in computing the pension cost for the
years ended December 31:
1997 1996 1995
<S> <C> <C> <C>
Weighted-average discount rate 7.0% 7.0% 7.0%
Assumed rate of compensation increases 3.0% 3.0% 3.0%
Expected long-term rates of return 7.5% 7.5% 7.5%
</TABLE>
(b) Employee Savings Plan
The Company adopted an Internal Revenue Code (IRC) Section 401(k)
plan for its employees effective January 1, 1992. Under the plan,
participants may contribute up to a maximum of 15% of their pre-tax
earnings or the dollar limit as prescribed by IRC Section 415(d). A
portion of participants' pre-tax earnings may be matched by the Company.
For the years ended December 31, 1997, 1996 and 1995, the Company's
contribution was approximately $43,700, $40,500 and $14,000,
respectively.
(c) Employee Stock Option Plan
The Company has adopted an incentive stock option plan recommended
by the Board of Directors and approved by the shareholders. This plan
grants options to purchase up to 1,000,000 shares of common stock of the
Company to officers and key employees. Option prices are 100% of the
fair market value at date of grant. The following schedule shows all
options granted, exercised, expired and exchanged under the Company's
Incentive Stock Option Plan as of December 31, 1997.
<TABLE>
Information relating to the options is as follows:
Option Price
Number Amount Total
of Shares Per Share Price
<S> <C> <C> <C>
Outstanding, January 1, 1995 194,740 $ 4.93 $ 961,105
Granted 45,200 7.53 340,200
Exercised (17,128) 4.88 (83,499)
Cancelled (1,191) 4.88 (5,806)
Outstanding, December 31, 1995 221,621 $ 5.47 $1,212,000
Granted 44,400 9.69 430,125
Exercised (170,433) 4.88 (830,861)
Cancelled (46,188) 7.20 (332,516)
Outstanding, December 31, 1996 49,400 $ 9.08 $ 448,748
Granted 66,150 17.49 1,180,706
Exercised (1,014) 9.69 (9,826)
Cancelled (2,525) 12.43 (31,398)
Outstanding, December 31, 1997 112,011 $14.20 $1,588,230
</TABLE>
At December 31, 1997, 14,761 options for shares of common stock
were exercisable.
The Company applies Accounting Principles Board Opinion No. 25 and
related Interpretations in accounting for its stock option plan.
Accordingly, no compensation cost has been recognized for its fixed
stock option plan. Had compensation cost for the Company's stock option
plan been determined based on the fair value at the grant dates for
awards under the plan consistent with the method of FASB Statement 123,
the Company's net income and earnings per common share for the year
ended December 31, 1997 would have been reduced to the pro forma amounts
indicated below:
<TABLE>
Net income (in thousands)
<S> <C>
As reported $61,292
Pro forma 61,188
Earnings per common share
As reported $1.87
Pro forma 1.87
</TABLE>
The fair value of options granted under the Company's fixed stock
option plan during 1997 was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used: dividend yield of 1.19%, expected volatility of
29.81%, risk free interest rate of 7.0%, and expected lives of 4 years.
6. INCOME TAXES
The following is a reconciliation of income taxes computed using
the Federal statutory rate with the provision for income taxes for the
years ended December 31,:
<TABLE>
1997 1996 1995
(in thousands)
<S> <C> <C> <C>
Provision for income taxes computed
at Federal statutory rate $ 31,695 $ 26,725 $ 19,737
Increase (decrease) in income taxes
resulting from:
Utilization of prior unrecognized
deferred tax asset relating to
investment losses (868) (5,767) (7,858)
Losses producing no current benefit 81 1,590 1,262
Other (1,642) (712) (5,809)
Provision for Federal
income taxes $ 29,266 $ 21,836 $ 7,332
</TABLE>
The Company provides for deferred income taxes resulting from
temporary differences which arise from recording certain transactions in
different years for income tax reporting purposes than for financial
reporting purposes. The sources of these differences and the tax effect
of each were as follows:
<TABLE>
1997 1996 1995
(in thousands)
<S> <C> <C> <C>
Deferred policy acquisition costs $ 341 $ (742) $ 333
Policyholders' account balances 5 (216) (189)
Investment adjustments (481) 135 (1,510)
Previously accrued expenses
currently deductible 0 0 0
Other (1,764) (540) (797)
Deferred Federal income tax benefit $(1,899) $(1,363) $(2,163)
</TABLE>
Deferred federal income taxes reflect the net tax effects of (a)
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes, and (b) operating loss carryforwards. Significant
components of the Company's net deferred tax (asset) liability as of
December 31, 1997 and 1996 are as follows (in thousands):
<TABLE>
1997 1996
<S> <C> <C>
Deferred income tax asset:
Investments $(6,003) $(5,522)
Insurance reserves (6,508) (5,584)
Operating loss carryforwards (1,669) (1,903)
Other (249) (292)
(14,429) (13,301)
Valuation allowance 5,322 6,072
Net deferred income tax asset $(9,107) $(7,229)
Deferred income tax liability:
Deferred policy acquisition costs $16,305 $15,964
Net unrealized investment gains 38,521 21,697
Policyholder account balances 90 85
Other 766 1,132
Deferred income tax liability 55,682 38,878
Net deferred income tax liability $46,575 $31,649
</TABLE>
The valuation allowance relates principally to investment
writedowns recorded for financial reporting purposes, which have not
been recognized for income tax purposes, due to the uncertainty
associated with their realizability for income tax purposes. Changes in
the valuation allowance for the years ended December 31, 1997 and 1996
primarily reflect the reduction in the deferred tax asset as a result of
the utilization of previously unrecognized investment losses.
Prior to 1984, Federal income tax law allowed life insurance
companies to exclude from taxable income and set aside certain amounts
in a tax memorandum account known as the Policyholder Surplus Account
("PSA"). Under the tax law, the PSA has been frozen at its December 31,
1983 balance of $2,900,000 which may under certain circumstances become
taxable in the future. The Insurance Company does not believe that any
significant portion of the amount in this account will be taxed in the
foreseeable future. Accordingly, no provision for income taxes has been
made thereon. If the amount in the PSA were to become taxable, the
resulting liability using current rates would be approximately
$1,015,000.
Under current tax law, there are certain limitations on the
utilization of non-life insurance company losses ("non-life losses")
against life insurance company income ("life income") in a consolidated
federal income tax return. The utilization of non-life losses against
life income in any year is limited to the lesser of 35 percent of life
income or 35 percent of non-life losses. Any unutilized balance of
non-life losses is carried over to subsequent tax years.
The Company has net operating loss carryforwards of approximately
$7,337,000 at December 31, 1997 of which $2,949,000 expire in 2009;
$2,487,000 in 2010; $1,671,000 in 2011; and $230,000 in 2012.
7. REINSURANCE
Reinsurance allows life insurance companies to share risks on a
case by case or aggregate basis with other insurance and reinsurance
companies. The Insurance Company cedes insurance to the reinsurer and
compensates the reinsurer for its assumption of risk. The maximum
amount of individual life insurance normally retained by the Company on
any one life is $50,000 per policy and $100,000 per life. The maximum
retention with respect to impaired risk policies typically is the same.
The Insurance Company cedes insurance primarily on an "automatic" basis,
under which risks are ceded to a reinsurer on specific blocks of
business where the underlying risks meet certain predetermined criteria,
and on a "facultative" basis, under which the reinsurer's prior approval
is required on each risk reinsured.
The reinsurance of a risk does not discharge the primary liability
of the insurance company ceding that risk, but the reinsured portion of
the claim is recoverable from the reinsurer. The major reinsurance
treaties into which the Insurance Company has entered can be
characterized as follows:
Reinsurance ceded from the Insurance Company to Life Reassurance
Corporation of America and Swiss Re Life & Health America Inc. at
December 31, 1997 and 1996 consists of coinsurance agreements
aggregating face amounts of $230.6 million and $257.0 million,
respectively, representing the amount of individual life insurance
contracts that were ceded to the reinsurers. The term "coinsurance"
refers to an arrangement under which the Insurance Company pays the
reinsurers the gross premiums on the portion of the policy to be
reinsured and the reinsurers grant a ceding commission to the Insurance
Company to cover its acquisition costs plus a margin for profit.
Reinsurance premiums ceded for 1997, 1996 and 1995 amounted to
approximately $4.5 million, $4.6 million, and $4.5 million,
respectively.
8. STATUTORY FINANCIAL STATEMENTS
Accounting practices used to prepare statutory financial statements
for regulatory filings of stock life insurance companies differ from
GAAP. Material differences resulting from these accounting practices
include: deferred policy acquisition costs, deferred Federal income
taxes and statutory non-admitted assets are recognized under GAAP
accounting while statutory investment valuation reserves are not;
premiums for universal life and investment-type products are recognized
as revenues for statutory purposes and as deposits to policyholders'
accounts under GAAP; different assumptions are used in calculating
future policyholders' benefits; and different methods are used for
calculating valuation allowances for statutory and GAAP purposes; fixed
maturities are recorded principally at market value or amortized cost as
appropriate under GAAP while under statutory accounting practices they
are recorded principally at amortized cost.
<TABLE>
For the years ended December 31,
1997 1996 1995
(in thousands)
<S> <C> <C> <C>
Statutory surplus $296,725 $250,869 $205,135
Statutory net income $ 57,081 $ 41,972 $ 38,834
</TABLE>
9. LITIGATION
From time to time, the Company is involved in litigation relating
to claims arising out of its operations in the normal course of
business. The Company is not a party to any legal proceedings, the
adverse outcome of which, in management's opinion, individually or in
the aggregate, would have a material adverse effect on the Company's
financial condition or results of operations.
10. FAIR VALUE INFORMATION
The following estimated fair value disclosures of financial
instruments have been determined using available market information,
current pricing information and appropriate valuation methodologies. If
quoted market prices were not readily available for a financial
instrument, management determined an estimated fair value. Accordingly,
the estimates may not be indicative of the amounts the Company could
have realized in a market transaction.
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is
practicable to estimate that value.
For fixed maturities and common stocks, estimated fair values were
based primarily upon independent pricing services. For a limited number
of privately placed securities, where prices are not available from
independent pricing services, the Company estimates market values using
a matrix pricing model, based on the issuer's credit standing and the
security's interest rate spread over U.S. Treasury bonds. Because it is
not practicable to obtain an independent valuation for each limited
partnership interest for purposes of disclosure, the market value of a
limited partnership interest is estimated to approximate the carrying
value. As of December 31, 1997, the Company was committed to
contribute, if called upon, an aggregate of approximately $73.7 million
of additional capital to certain of these limited partnerships. The
market value of short-term investments, mortgage loans and policy loans
is estimated to approximate the carrying value.
Estimated fair values of policyholders' account balances for
investment type products (i.e., deferred annuities, immediate annuities
without life contingencies and universal life contracts) are calculated
by projecting the contract cash flows and then discounting them back to
the valuation date at the appropriate discount rate. For immediate
annuities without life contingencies, the cash flows are defined
contractually. For all other products, projected cash flows are based
on an assumed lapse rate and crediting rate (based on the current
treasury curve), adjusted for any anticipated surrender charges. The
discount rate is based on the current duration-matched treasury curve,
plus an adjustment to reflect the anticipated spread above treasuries on
investment grade fixed maturity securities, less an expense and profit spread.
<TABLE>
December 31, 1997 Carrying Value Estimated Fair Value
(in thousands)
<S> <C> <C>
Assets
Fixed Maturities:
Available for Sale 1,909,924 1,909,924
Common Stock 45,773 45,773
Mortgage Loans 17,865 17,865
Policy Loans 18,120 18,120
Cash and Short-Term Investments 277,578 277,578
Other Invested Assets 208,162 208,162
Liabilities
Policyholders' Account Balances 1,280,900 1,288,551
Note Payable 50,000 52,500
Short-Term Note Payable 20,000 20,000
December 31, 1996 Carrying Value Estimated Fair Value
(in thousands)
Assets
Fixed Maturities:
Available for Sale 1,823,349 1,823,349
Common Stock 42,059 42,059
Mortgage Loans 18,622 18,622
Policy Loans 18,068 18,068
Cash and Short-Term Investments 240,857 240,857
Other Invested Assets 176,103 176,103
Liabilities
Policyholders' Account Balances 1,260,545 1,225,654
Other Notes Payable 50,000 50,000
Short-Term Note Payable 5,000 5,000
</TABLE>
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data is presented below. Certain
amounts have been reclassified to conform to the current year's
presentation.
<TABLE>
Three Months Ended
1997 March 31 June 30 September 30 December 31
(in thousands, except per share)
<S> <C> <C> <C> <C>
Premiums and other
insurance revenues $ 6,390 $ 6,637 $ 9,024 $ 7,796
Net investment income 48,623 49,399 44,444 49,352
Realized investment
gains 2,510 8,503 9,518 5,508
Total revenues 57,523 64,539 62,986 62,656
Benefits and expenses 38,951 41,022 40,128 37,045
Net income 12,548 16,372 16,018 16,354
Net income per share $ .38 $ .50 $ .49 $ .50
</TABLE>
<TABLE>
Three Months Ended
1996 March 31 June 30 September 30 December 31
(in thousands, except per share)
<S> <C> <C> <C> <C>
Premiums and other
insurance revenues $ 2,691 $ 3,447 $ 5,533 $ 5,803
Net investment income 49,753 44,188 42,958 49,281
Realized investment
gains 1,479 8,249 7,484 2,808
Total revenues 53,923 55,884 55,975 57,892
Benefits and expenses 36,865 35,418 36,049 38,985
Net income 10,358 14,316 14,084 15,763
Net income per share $ .31 $ .43 $ .42 $ .44
</TABLE>
<TABLE>
Schedule II
PRESIDENTIAL LIFE CORPORATION (PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
(in thousands)
December 31,
1997 1996
<S> <C> <C>
ASSETS:
Investment in subsidiaries at equity $512,257 $445,469
Cash in bank 29 69
Real estate, net 38 41
Fixed maturities, available for sale 11,038 10,041
Investments, common stocks 2,193 2,502
Short term investments 2,695 4,089
Other invested assets 42,593 14,747
Deferred debt issue costs 874 1,169
Other assets 3,829 3,774
TOTAL ASSETS $575,546 $481,901
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Accounts payable, accrued expenses
and taxes $ 898 $ 1,433
Notes payable, long term 50,000 50,000
Short term note payable 20,000 5,000
Other liabilities 1,994 2,405
TOTAL LIABILITIES 72,892 58,838
Total Shareholders' Equity 502,654 423,063
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $575,546 $481,901
</TABLE>
<TABLE>
Schedule II
PRESIDENTIAL LIFE CORPORATION (PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
(in thousands)
Year Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
REVENUES:
Income from rents $ 739 $ 739 $ 739
Investment income 5,460 3,435 620
Realized investment gains (losses) (933) 1,932 271
Other income 720 0 0
Total Revenues 5,986 6,106 1,630
EXPENSES:
Operating and administrative 517 2,459 803
Interest 5,850 5,049 5,045
Total Expenses 6,367 7,508 5,848
Loss before federal income taxes and
equity in income of subsidiaries (381) (1,402) (4,218)
Federal income tax benefit (926) (1,667) (2,851)
Income (loss) before equity in income
of subsidiaries 545 265 (1,367)
Equity in income of subsidiaries
before deducting dividends received 60,747 54,256 50,425
Net income $61,292 $54,521 $49,058
</TABLE>
<TABLE>
Schedule II
PRESIDENTIAL LIFE CORPORATION (PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Operating Activities:
Net income $ 61,292 $ 54,521 $ 49,058
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Realized investment (gains) losses 933 (1,932) (271)
Depreciation and amortization 299 299 299
Equity in undistributed profits of
subsidiary companies (60,747) (54,256) (45,425)
Deferred Federal income taxes (99) 609 (845)
Dividends from subsidiaries 24,800 15,000 5,000
Changes in:
Accrued investment income 165 (1,409) (279)
Accounts payable and accrued expenses (536) 1,288 658
Other assets and liabilities (751) 1,308 (3,733)
Net Cash Provided By (Used In)
Operating Activities 25,356 15,428 4,462
Investing Activities:
Purchase of fixed maturities (1,988) (8,301) (492)
Sale of fixed maturities 1,000 9,016 4,737
Common stock acquisitions 0 (1,529) 0
Common stock sales 0 1,974 0
Other invested asset additions (37,846) (10,760) 0
Other invested asset distributions 10,000 0 0
Decrease (increase) in short-term investments 1,394 800 (3,390)
Net Cash Provided By (Used In)
Investing Activities (27,440) (8,800) 885
Financing Activities:
Dividends to shareholders (7,194) (4,967) (3,526)
Proceeds from line of credit 15,000 5,000 0
Repurchase of common stock (5,762) (7,038) (1,623)
Net Cash Provided By (Used In)
Financing Activities (2,044) (7,005) (5,149)
Increase (Decrease) in Cash (40) (377) 168
Cash at Beginning of Year 69 446 278
Cash at End of Year $ 29 $ 69 $ 446
</TABLE>
<TABLE>
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES Schedule III
SUPPLEMENTAL INSURANCE INFORMATION
(in thousands)
Column A Column B Column C Column D
Future Policy
Benefits,
Losses, Claims,
Deferred Loss Expenses,
Policy and Policy-
Acquisition holder Account Unearned
Segment Costs Balances Premiums
<S> <C> <C> <C>
Year Ended
December 31, 1997
Life Insurance $ 7,647 $ 128,994 $0
Annuity 30,037 1,585,682 0
Accident and
Health 0 24 2
Total $37,684 $1,714,700 $2
Year Ended
December 31, 1996
Life Insurance $ 6,466 $ 124,766 $0
Annuity 33,317 1,553,518 0
Accident and
Health 0 21 2
Total $39,783 $1,678,305 $2
Year Ended
December 31, 1995
Life Insurance $ 6,674 $ 120,232 $0
Annuity 26,656 1,562,415 0
Accident and
Health 0 34 2
Total $33,330 $1,682,681 $2
</TABLE>
<TABLE>
Column A Column E Column F Column F-1
Other
Policy Mortality,
Claims Surrender
and and Other
Benefits Premium Charges to
Segment Payable Revenue Policyholders
<S> <C> <C> <C>
Year Ended
December 31, 1997
Life Insurance $ 281 $ 3,973 $1,530
Annuity 0 19,655 458
Accident and
Health 0 3 0
Total $ 281 $ 23,631 $1,988
Year Ended
December 31, 1996
Life Insurance $ 110 $ 4,240 $1,488
Annuity 0 8,461 602
Accident and
Health 0 4 0
Total $ 110 $ 12,705 $2,090
Year Ended
December 31, 1995
Life Insurance $ 116 $ 4,404 $1,378
Annuity 0 3,780 556
Accident and
Health 0 4 0
Total $ 116 $ 8,188 $1,934
</TABLE>
<TABLE>
Column A Column G Column H Column I
Benefits,
Claims, Losses,
Interest
Credited to Amortization
Account Balances of Deferred
Net and Policy
Investment Settlement Acquisition
Segment Income Expenses Costs
<S> <C> <C> <C>
Year Ended
December 31, 1997
Life Insurance $ 11,416 $ 12,114 $1,100
Annuity 180,401 124,431 5,481
Accident and
Health 1 8 0
Total $191,818 $ 136,553 $6,581
Year Ended
December 31, 1996
Life Insurance $ 10,733 $ 13,076 $ 880
Annuity 175,445 110,855 6,270
Accident and
Health 2 (1) 0
Total $186,180 123,930 $7,150
Year Ended
December 31, 1995
Life Insurance $ 9,487 $ 11,411 $ 811
Annuity 161,291 112,081 4,632
Accident and
Health 2 4 0
Total $170,780 $ 123,496 $5,443
</TABLE>
<TABLE>
Column A Column J Column K
Other
Operating Premiums
Segment Expenses Written
<S> <C> <C>
Year Ended
December 31, 1997
Life Insurance $ 2,738
Annuity 5,405
Accident and
Health 19 $3
Total $ 8,162
Year Ended
December 31, 1996
Life Insurance $ 4,325
Annuity 6,836
Accident and
Health 27 $4
Total $11,188
Year Ended
December 31, 1995
Life Insurance $ 3,696
Annuity 5,771
Accident and
Health 23 $5
Total $ 9,490
</TABLE>
<TABLE>
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES Schedule IV
REINSURANCE (in thousands)
Column A Column B Column C Column D
Assumed
Ceded to From
Gross Other Other
Amount Companies Companies
<S> <C> <C> <C>
Year Ended December 31, 1997
Life Insurance in Force $ 823,257 $ 476,248 $ 452,480
Premiums:
Life Insurance $ 8,065 $ 4,512 $ 420
Annuity 19,655 0 0
Accident and Health Insurance 3 0 0
Total $ 27,723 $ 4,512 $ 420
Year Ended December 31, 1996
Life Insurance in Force $ 864,809 $ 517,484 $ 473,779
Premiums:
Life Insurance $ 8,292 $ 4,518 $ 466
Annuity 8,461 0 0
Accident and Health Insurance 4 0 0
Total $ 16,757 $ 4,518 $ 466
Year Ended December 31, 1995
Life Insurance in Force $ 933,735 $ 573,324 $ 446,079
Premiums:
Life Insurance $ 8,472 $ 4,527 $ 459
Annuity 3,780 0 0
Accident and Health Insurance 4 0 0
Total $ 12,256 $ 4,527 $ 459
</TABLE>
<TABLE>
Column A Column E Column F
Percentage
of Amount
Net Assumed
Amount to Net
<S> <C> <C>
Year Ended December 31, 1997
Life Insurance in Force $ 799,489 56.60
Premiums:
Life Insurance 3,973 10.57
Annuity 19,655 0
Accident and Health Insurance 3 0
Total $ 23,631
Year Ended December 31, 1996
Life Insurance in Force $ 821,104 57.50
Premiums:
Life Insurance $ 4,240 10.52
Annuity 8,461 0
Accident and Health Insurance 4 0
Total $ 12,705
Year Ended December 31, 1995
Life Insurance in Force $ 806,490 55.31
Premiums:
Life Insurance $ 4,404 10.42
Annuity 3,780 0
Accident and Health Insurance 4 0
Total $ 8,188
Note: Reinsurance assumed consists entirely of Servicemen's Group Life
Insurance.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 13,480
<SECURITIES> 2,219,795
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,028
<DEPRECIATION> (424)
<TOTAL-ASSETS> 2,558,341
<CURRENT-LIABILITIES> 34,317
<BONDS> 50,000
0
0
<COMMON> 326
<OTHER-SE> 502,328
<TOTAL-LIABILITY-AND-EQUITY> 2,558,341
<SALES> 23,631
<TOTAL-REVENUES> 247,704
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 157,146
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,850
<INCOME-PRETAX> 90,558
<INCOME-TAX> 29,266
<INCOME-CONTINUING> 61,292
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 61,292
<EPS-PRIMARY> 1.87
<EPS-DILUTED> 1.87
</TABLE>
